EU Court Confirms the Annulment of the European Commission’s Decision Prohibiting the UPS/TNT Transaction

By Covington Competition on March 11, 2019

Posted in Antitrust, Competition, Competition Law, Competition Law in Europe, European Commission, European Union, Mergers

On 16 January 2019, the European Court of Justice (“ECJ”) rejected the European Commission’s (“Commission”) appeal in Commission v. UPS. The judgment followed Advocate General Kokott’s Opinion of July 2018, and upholds the 2017 judgment of the General Court (“GC”) annulling on procedural grounds the Commission’s decision prohibiting the acquisition of TNT by UPS.

Background

In 2013, the Commission prohibited the €5.2 billion acquisition of TNT by UPS, finding that, in fifteen EEA Member States, this was a three-to-two transaction which would have resulted in a significant impediment to competition in the market for international express delivery of small parcels. Central to the decision was the Commission’s econometric analysis, which found that prices in the relevant markets would likely rise pursuant to the transaction.

The GC held that the Commission had breached UPS’ rights of defence by applying a substantially different econometric model in its final assessment of the merger than had been disclosed to the Parties. The GC rejected the argument that it was sufficient for the Commission to have informally communicated the change to the Parties, without issuing a new statement of objections (“SO”). The Commission appealed the GC judgment.

The ECJ’s Judgment

The ECJ rejected the Commission’s arguments and found that the Commission had infringed UPS’ rights of defence (1), which had consequences for the validity of the Commission decision (2). In addition, the Court rejected the Commission’s argument that the GC had not met its obligation to state reasons (3).

The Commission infringed UPS’ rights of defence

The Commission argued that it was not required to communicate to the Parties the final version of its econometric model, taking the position that there was no obligation to disclose its subsequent interim assessment of the issues set out in the SO, since the econometric model had merely been refined on the basis of information submitted by the Parties.

The ECJ acknowledged the “inherently provisional” nature of the SO. However, it held that the Commission was not permitted to modify the substance of the econometric model without allowing the Parties to submit arguments regarding the accuracy and relevance of the factors ultimately taken into account. The Court found that, while the Commission is bound by the strict time limits of the merger review process, this needs to be reconciled with the Parties’ rights of defence. The changes to the model were neither negligible, as the Commission claimed, nor would it have been impossible to disclose to the Parties the changes, which had been made more than two months before the decision was adopted.

Consequences for the validity of the Commission decision

The Commission also argued that the decision should not have been annulled, claiming that the GC had erroneously applied the test set out in Solvay v. Commission (under which the failure to disclose exculpatory evidence can result in the annulment of a decision). The Commission took the position that the econometric model was not an exculpatory piece of evidence. Rather, it was a tool to assess the proposed merger. Accordingly, the Commission argued, the GC ought to have applied the test in Aalborg Portland and Others v. Commission, under which the failure to disclose incriminating evidence can only lead to the annulment of a decision in the absence of alternative evidence of which the Parties were aware during the administrative procedure.

The ECJ dismissed the Commission’s arguments, stressing the importance of having an objective and transparent merger control procedure. It found that the methodologies used in the econometric models must be as objective as possible because they contribute to the impartiality and quality of Commission decisions and, in turn, to people’s belief in the legitimacy of EU merger control. Interestingly, the Court also held that, if the annulment of a Commission decision was subject to a higher standard of proof, this would be likely to result in a reduction in transparency, particularly the disclosure of the relevant econometric models to the Parties. This, in turn, would undermine the effectiveness of any subsequent judicial review. In short, the Court confirmed the GC’s reasoning that, even if the substance of the decision would not necessarily have been different, “even a slight chance” that the Parties would have been able to better defend themselves if they had been notified of the change will suffice for the decision to be annulled.

Obligation to state reasons

Finally, the Commission argued that the GC had not met its obligation to state reasons. The ECJ dismissed this claim, holding that the GC had fulfilled its obligation when it implicitly rejected the Commission’s claim that the Parties should intuitively have been able to identify the changes made to the econometric model.

Conclusion

The Commission’s merger control analysis is becoming increasingly complex, relying on sophisticated econometric evidence. In this context, the ECJ judgment is likely to have an important impact on future cases, for two reasons. First, the judgment clarifies the rules regarding the application of econometric models and related evidentiary and procedural requirements. Second, it re-emphasizes the importance of transparency in merger review, not only relating to the rights of the Parties but also as a principle of sound administration.

While UPS has filed a claim seeking €1.7 billion in damages from the Commission for the losses said to result from the prohibition decision, it will not to be able to acquire TNT since its competitor, FedEx, acquired TNT for €4.4 billion, in 2016.