On 25 July 2018, Advocate General (AG) Kokott issued a non-binding Opinion in case C-265/17 P, Commission v United Parcel Service, advising the Court of Justice of the EU (CJEU) to dismiss the Commission’s appeal against the judgement of the General Court (GC) that annulled the Commission’s decision to block the proposed acquisition of TNT by UPS.
UPS notified the proposed acquisition of TNT for approximately EUR 5 billion on 15 June 2012. More than six months later, on 30 January 2013 the Commission blocked the proposed merger based on concerns that it would lead to a significant impediment of effective competition (SIEC) on the market for international intra-EEA express deliveries for small packages in 15 Member States.
On 7 March 2017 the GC issued a favourable judgement for UPS (case T-194/13, United Parcel Service v Commission). The Court found that the Commission breached UPS’s rights of defence by relying on the latest version of an economic analysis which was not shared with the merging parties before the merger was blocked. The Commission appealed the GC’s judgement on 16 May 2017.
In the meantime, TNT was acquired by FedEx for EUR 4 billion, in January 2016, in a deal that received unconditional approval by the Commission. While UPS may have lost the chance to consolidate its express deliveries business with TNT, AG Kokott’s favourable Opinion will arguably boosts UPS’s chances to win an action for damages for EUR 1.7 billion against the Commission filed by UPS in February 2018 (case T-834/17, United Parcel Service v Commission).
AG Kokott’s Opinion, which is largely in line with the GC’s judgment, provides an important reminder – especially to the Commission – that the rights of defence should be upheld without excuses, including in merger control proceedings.
The Heart of the Debate: The Rights of Defence in Merger Control Proceedings
In her Opinion, AG Kokott notes that at the heart of the dispute between UPS and the Commission lies the question of whether the Commission was allowed to make material changes to its economic analysis (a so-called ‘price concentration model’) during the on-going administrative merger review procedure without informing UPS. More broadly, AG Kokott tries to clarify the scope of protection of the merging parties’ rights of defence in merger control proceedings.
To answer these fundamental questions, AG Kokott addresses the following issues:
- Do the rights of defence apply to econometric models in merger control proceedings?; if so
- What are the requirements that arise from the rights of defence; and lastly
- What are the effects of an infringement of the rights of defence?
1. Do the Rights of Defence Apply to Econometric Models in Merger Control Proceedings?
AG Kokott notes in her Opinion that the Commission and UPS spent a considerable amount of time arguing whether the rights of defence apply to econometric models used in merger control proceedings at all. UPS considers that econometric models should form part of the facts and evidence in relation to which the merging parties should be able to submit observations. On the other hand, the Commission contends that such econometric models are simply a ‘tool’ used by competition authorities to assess whether a merger significantly impedes competition and as such, merging parties do not necessarily need to be heard.
The AG quickly disposes of this debate calling it a ‘secondary theory of war’ because, according to settled case law “observance of the rights of defence requires that addressees of decisions which significantly affect their interest be placed in a position in which they can effectively make known their views as regards all elements (italics in the original) of which the authorities intend to base their decisions.”
In this sense, AG Kokott considers that an econometric model such as the price concentration model undoubtedly constitutes an element on which the Commission relied on to block the proposed acquisition of TNT by UPS. The AG further notes that in order for UPS’s rights of defence to be observed, the Commission had to allow UPS to provide observations on the latest version of the econometric model, especially because such an econometric model could lead to quite different results depending on the configuration and values attributed to that model.
More broadly, she considers that the Commission must provide the merging parties with all elements on which the Commission intends to rely on in order for the undertakings concerned to make their views known. This includes all elements identified by the Commission, including those elements that the Commission may not wish to rely on. According to AG Kokott, this is so because it is not for the Commission but rather the undertakings concerned to decide which elements are relevant for their defence.
AG Kokott further dismisses the Commission’s categorisation of econometric models as ‘purely internal documents’. According to her, “the rights of defence would be devoid of meaning if the Commission left the undertakings concerned in the dark about the key analytical steps and the calculations on which it based its predictions of a significant impediment of effective competition resulting from the proposed merger.”
Finally, the AG notes that the rights to good administration codified in Article 41 of the Charter of Fundamental Rights require that the Commission conducts a fair procedure which would not be the case if the undertakings ultimately had to guess what they were defending themselves against. Therefore, AG Kokott concludes that a price concentration model such as the one used by the Commission in this case “unambiguously falls within the scope of application of the rights of defence.”
2. What are the requirements that arise from the rights of defence?
AG Kokott notes that the main question in this case is whether it is really necessary to make the merging parties aware of the final version of an econometric model and to offer them an opportunity to submit observations before a final decision is issued.
In this sense, AG Kokott agrees with the Commission’s arguments – which are based on settled case law – that the final decision in competition cases does not have to be fully in line with the Statement of Objections (SO) previously sent to the merging parties. However, the AG makes an important distinction: if the Commission deviates from the SO in favour of the parties, then it is not necessary to hear them again. However, if the Commission’s assessment deviates from the SO to the detriment of the undertakings by introducing “completely new elements, theories or calculation models in relation which it has not heard the undertakings”, then the Commission “is required to give the undertakings an opportunity to submit observations”. AG Kokott clarifies that this is because the Commission is only permitted to base its final decision on objections on which the parties had the opportunity to submit observations, pursuant to Article 18(3) of the EU Merger Regulation (EUMR).
AG Kokott also agreed with the Commission that merger control proceedings are characterised by a requirement of speed and the parties should not engage in endless discussions regarding economic evidence. However, AG Kokott adds that in any case, “despite the unquestionable constraints of merger proceedings, the undertakings concerned must always be allowed sufficient room for the purpose of their defence and the substance of their rights of defence must not be affected.”
In relation to the case at hand, AG Kokott notes that, if by way of exception the Commission does not decide on a final version of an econometric model until after the SO has been issued, then this delay cannot result in the rights of defence being prejudiced. Rather, in such situations the Commission must allow the merging parties to be heard again separately on this point, unless the final version of the econometric model is not materially different from previous versions discussed.
3. What are the effects of an infringement of the rights of defence?
AG Kokott notes that in the present case, the course of events show “in a striking manner” that the finding of a SIEC and the number of Member States affected, critically depends on the specific configuration of the price concentration model used. Specifically, in the SO the Commission informed the merging parties that the proposed merger would produce such negative effects in 29 national markets, however, on the basis of the latest version of the econometric model used by the Commission, a SIEC was found in only 15 Member States.
In this regard, AG Kokott notes that according to settled case law, a procedural error justifies the annulment of a Commission decision only where the outcome of the administrative procedure might have been different without that procedural error. In this specific case, AG Kokott argues that an undertaking can normally defend itself more easily against objections of a SIEC in 15 Member States than in 29 Member States. In other words, the omission of the latest version of the price concentration model was to the detriment of the merging parties. In addition, had the merging parties been made aware of the latest price concentration model, they would have been in a better position to provide commitments to the Commission and thus increase their chances of proceeding with the proposed transaction.
As AG Kokott puts it, this case is a “textbook” example of how the Commission should behave in merger control proceedings in order to protect the parties’ rights of defence. In particular, the Commission must allow the merging parties to make their views known in relation to all elements identified by the Commission, including those elements that the Commission may not wish to rely on, and especially if there are new elements that would significantly affect the merging parties’ interest.
For a general overview of the rights of defence in EU competition proceedings, including merger control proceedings, please refer to Steptoe’s Lexis Nexis practice note (subscription only).
 Judgments of 24 October 1996, Commission v Lisrestal and Others (C 32/95 P, EU:C:1996:402, paragraph 21); of 22 October 2013, Sabou (C 276/12, EU:C:2013:678, paragraph 38); and of 14 June 2016, Marchiani v Parliament (C 566/14 P, EU:C:2016:437, paragraph 51).