A comment on Case T-79/12 Cisco Systems and Messagenet v European Commission (Microsoft/Skype)
On 15 February 2012, Cisco Systems and Messagenet appealed the Commission’s decision authorizing the purchase of Skype by Microsoft. On 11 December 2013, the General Court rendered its Judgment dismissing the application for annulment.
As many readers of this blog will know, I was one of the lawyers representing the applicants, and was personally very involved in the judicial phase of the case, which I very much enjoyed. For the past 5 months I’ve read some succinct comments about and I think that there are many genuinely interesting things about it that might so far have been overlooked.
Whereas I –biased as I am- have issues with most of what’s in the Judgment (and particularly with what isn’t there), I’ve decided to try to get rid of any bitterness (some irony will be inevitable, I’m afraid) and approach it in a hopefully constructive way, leaving a myriad factual case-specific issues aside, and focusing only on selected matters of general relevance to any competition lawyer.
So instead of re-arguing the case –which would be of little use at this time- my intention is to shed light on some aspects of the Judgment which otherwise not attract the attention they deserve. I’ll touch on 6 selected issues, and will offer some personal views as a conclusion.
Needless to say, my opinions are, aside from non-objective, exclusively attributable to myself, not to anyone else, notably clients and colleagues, and neither Cisco nor Messagenet have anything to do with this post.
1) The Court ruled that the standards of proof and review applicable to Phase I (Art.6) decisions are identical to those applicable to Phase II (Art. 8) decisions
Whereas we argued that the merger should be annulled regardless of how the Court interpreted the applicable standards of proof and review, we also claimed that the standard of proof must necessarily be higher in the case of Phase I decisions because the Commission has to prove that the case couldn’t objectively give rise to “serious doubts” (which is the applicable legal test according to Art 6 of Regulation 139).
This interpretation, now held wrong, was fairly uncontroverted in academia (see e.g. the contributions EUI’s 2009 workshop on standard of proof in competition law), and had been formulated previous cases. In her Opinion in Impala AG Kokott went even further and explained that a “beyond reasonable doubt” standard applied to Phase I decisions “to compensate for the fact that at that stage the investigation of a concentration is merely a summary one” (…) “[a]t that stage, serious doubts as to the compatibility of a concentration with the common market will only prevented its being cleared to quickly and force the Commission to make a more extensive investigation in a formal procedure”. A test of absence of doubts also governs the initiation of in-depth reviews in the State aid domain, and the Court has established in that context that this test requires a review that “will, by nature, go beyond simple consideration of whether or not there has been a manifest error of assessment” on the Commission’s part (for more on this see, e.g. cases T-73/98, para 47 and T-119/02, para 77).
The Judgment in this case nonetheless states that “the standard of proof is no higher for decisions adopted under Article 6 of Regulation 139/2004 than those adopted under Article 8 of that regulation” (para 46). The Court then goes on to explain that even if we correctly argued that the Commission has no discretion as regards the initiation of Phase II whenever it has serious doubts, the Institution “enjoys a certain margin of discretion” to carry out the “complex economic assessments” required in merger cases (para. 49), and that therefore the standard of review for both Phase I and Phase II is the same: that applied to complex economic assessments (limited judicial review).
What the Court is effectively saying in paras 46 to 49 is that even if the notion of serious doubts is an objective one, the Commission has discretion to have doubts or not. In my mind, this would mean that the alleged objectivity of the concept is meaningless, but perhaps there’s a different reading, which I don’t yet grasp. Even if the standard of review is the same for Phase I and Phase II decisions, it seemed intuitive to me that what has to be proved in one case (no serious doubts) and the other (compatibility or incompatibility with the internal market) is different. By rejecting this previously uncontroversial interpretation I think the Court has importantly -rightly or wrongly- expanded the Commission’s margin of discretion in merger cases.
2) Unless I’m missing something in para. 67 the Court explains that competitive assessments in most Phase I decisions are not to be taken seriously because they do not assess the “real” relevant market.
“The applicants therefore base their complaint relating to market power held by the new entity on an incorrect assumption, in so far as the Commission did not define the existence of a specific market for consumer video communications on Windows based PCs. The Commission did not therefore establish in the contested decision that operators present on the narrow market could act independently of the competitive pressure from other means of consumer communications, such as services offered on other platforms or other operating systems. In addition, the applicants did not themselves submit any evidence or study to support the conclusion of the existence of such a narrow market. By contrast, they merely criticised the factors put forward in the contested decision in order to qualify the significance of market shares”.
What this paragraph says isthat the fact that the Commission chose to assess the market for video communications on Windows based PCs was irrelevant, and that we could only have challenged this assessment if we proved that the market was the real one (!). This is quite astonishing may perhaps be a bit surprising to some, because what we were challenging was precisely the conclusion that “the proposed transaction does not give rise to any competition concerns even on the narrowest possible definition of the relevant product market”. The market might have been hypothetical, but its assessment was the only one contained in the decision and therefore the only one that could be appealed.
Unless I’m wrong (again, let me know if you see it differently) what this means that from now onwards any party wishing to appeal a Phase I merger decision should not challenge the assessment actually carried out by the Commission, but will need to prove that the assessment of the “narrowest possible market” corresponds to a real market, which will almost never be the case! In other words, from now onwards the Commission could get immunity from Court review by carrying out assessments of markets whose definition is left open.
3) On the irrelevance of market shares in dynamic markets
The few paragraphs that have so far received public attention are the ones concerning the irrelevance of high market shares. In para 69 the Judgment states that “the consumer communications sector is a recent and fast‑growing sector which is characterised by short innovation cycles in which large market shares may turn out to be ephemeral. In such a dynamic context, high market shares are not necessarily indicative of market power”.
In fact, I agree with this statement. Market shares in these markets are “not necessarily indicative of market power”; they provide an indication which may be disproved by other factors. My problem with this is they do provide an indication, and even if it can be disproved by looking at countervailing factors, I still struggle to see those here.
In any event, there are a few paras in this section (mainly paras 79 to 84) that that are potentially quite troublesome for enforcement, particularly in technology and communication markets. No wonder these will from now onwards be cited by any company with large market shares.
4) On the irrelevance of network effects in a non-interoperable communications market
Paragraph 76 also marks –in my view- a change in the way network effects are assessed in EU competition law by stating that “the existence of network effects does not necessarily procure a competitive advantage for the new entity”.
This may seem at odds with all past Commission precedents, mainstream economics, regulation of other communication markets, the Commission’s soft law on market definition, 102 and mergers, as well as with Skype’s own repeated statements in official public submissions claiming that “the scale, global distribution and growth of our user base provide us with powerful network effects, whereby Skype becomes more valuable as more people use it, thereby creating an incentive for existing users to encourage new users to join. We believe that these network effects help us attract new users and provide significant competitive advantages”.
You may recall that the Decision’s argument to rebut the role of network effects was that users “make the majority of their voice and video calls to the small number of family and friends that make up their so called “inner cicle” (4-6 people) and that “it is not difficult for these groups to move between communication services”. This peculiar argument was endorsed by the Court. As I’ve repeatedly said over the past two years, I may well Skype the most with my wife, girlfriend (J), mother and best friend, but I would assume that my best friend has in turn a different mother, girlfriend and wife (or so I’d like to think…); in other words, groups of people are interconnected and do not communicate in movable autarkic nodules. On this point, the Judgment simply repeats (thereby endorsing) the Commission’s argument at the end of para 52 (“the network effects to which the concentration might give rise would be diluted by the fact that users tend to communicate in small restricted circles and use a range of operators. Those factors demonstrate the ease with which user groups switch to other communications services”). [On multi-homing, note that the “range of operators” meant the two merging parties –otherwise they couldn’t have a 90% market share- as openly acknowledged in footnote 52 of the decision].
4) On the identification of competitive constraints.
A paragraph that could also prove important for various markets where companies rely on others’ technology (and for private label products) is para. 72, which dismisses the claim that Facebook (the second largest player with an overwhelming 10% of the market, whose video call service runs on Skype, which has Microsoft as a shareholder and which interoperates with Skype) would not be an effective competitor with this reasoning.
“The only factor that they put forward in support of that argument is that Facebook is a licensee and strategic ally of Skype, which cannot use Skype’s software to offer services in competition with the paid services of Skype, called SkypeOut, which make it possible to, inter alia, call fixed or mobile telephone numbers and to conduct video calls involving more than two persons. However, they do not submit that that agreement prevents Facebook from offering its video communications services to consumers who might decide to switch away from the new entity if it decided to exert any market power.
So, being a “strategic ally”, using the same technology and the existence of a non-compete agreement do not indicate mitigated competitive vigor. Note taken.
5) On switching, statement of reasons and the comparison with the Microsoft (and Google) abuse cases
[Click here to continue reading]
Paras 73 and 79-80 of the Judgment validate the Commission’s point about downloading being able to offset network effects by pointing out that “contrary to the situations that formed the basis of the Commission’s previous decisions which are relied upon by the applicants, and as stated by the intervener, there are no technical or economic constraints which prevent users from downloading several communications applications on their operating device, especially as the software concerned is free, easy to download and takes up little space on their hard drives”.
This is important because in para 96 the Court rejects the claim that the Commission deviated from its own precedents (previous Microsoft cases on downloading and multi-homing). The Court states only that “unlike the earlier decisions, the case in point is not characterized by the presence of technical or economic constraints preventing users from downloading several” applications at the same time, and that “there can therefore be no question of any change in policy for which the Commission ought to have stated reasons in the contested decision”.
However, as most of you may recall, the absence of technical or economic constraints was precisely the argument used by Microsoft to defend itself in prior cases (both in 2004 and particularly in 2009). Both the Commission and the Court based their case on the idea that, technical and economic constraints aside, network effects and user’s inertia also play a very important role. Don’t take my word; instead read, e.g. paras 47 and 48 of the 2009 Microsoft commitment decision.
By forgetting about these, the Court rightly or wrongly shifts away from those precedents, from arguments inspired in behavioral economics, and providing –at a very convenient moment- an unbeatable defensive argument for Google (go now tell Google that competition in search is not one click away or that people can’t download apps other than those allegedly bundled to Android!) Indeed, there are no technical or economic obstacles to using another search engine nor to downloading apps in mobile phones. Paradoxically, complainants in the search investigation against Google (including the intervener in this case) nevertheless complain that… network effects and inertia also need to be considered! Ah, isn’t competition law fascinating…
6) On the analysis of the cross-market effects
In our view, the main consumer harm arising from the merger affected the enterprise communications market (by granting Microsoft’s Lync -already the preeminent and arguably dominant enterprise UC solution, fueled also by the dominance of Outlook and Office- exclusive access to the great majority of users of consumer UC solutions). As publicly revealed in the course of the proceedings, this was the main business motivation for Microsoft to invest $ 8.6 billion in acquiring Skype.
Despite the “conglomerate” label, this is a fairly easy to grasp cross-market effects theory for a two-sided market: if enterprises want to access consumers and company A gains a dominant position vis à vis consumers, then it’s likely that it’ll manage to tip the enterprise side in its favor too.
This should have been the heart of the case, but it wasn’t. That’s why this aspect the case is more relevant to those interested in judicial review than to those interested in substantive issues. What happened was that, despite adequately summarizing our theory of harm in para 213 of the Decision, the Commission’s rebuttal (in 215 and 221) was -aside from internally inconsistent- totally unrelated to the concern expressed (again, don’t take my word; you can easily read them and verify it yourselves).
In view of the fact that the reasoning in the decision was invalid, the Judgment ignores it and includes a new reasoning (contained in paras 120 to 121) of which you will find absolutely no trace in the decision. I always thought that the “manifest error of appraisal test” was justified precisely for the Court not to substitute the Commission’s assessment for its own, but again I might have been wrong.
Conclusion
What I think explains this case is that the Commission did, in good faith, not see a prima facie competitive problem arising out of the merger, took the decision to clear it in Phase I, and then attempted to solve the difficulties it encountered by throwing out to the wall every conceivable argument and then see what stuck, including some that were not solid or that were inconsistent with previous practice.
The Court’s reaction may be explained similarly. Whereas I was hoping to have a more traditional sort of judicial review (one merely looking at whether the Commission’s conclusion –no serious doubts even in the narrowest possible relevant market- was right and rightly justified), the members of the Court probably also had an intuition that, leaving the decision aside, the merger would not give rise to real life problems and that, ultimately, its clearance was justified.
The problem is that saving the decision could only be done, as we’ve seen, by -factual issues aside- (i) adopting a questionable approach regarding the standard of proof applicable to Phase I decisions (ii) minimizing the importance of large market shares in technology markets; (iii) minimizing the importance of network effects as barriers to entry, even in a communication market without interoperability (precisely the textbook situation where they’d be relevant!); (iv) rightly or wrongly deviating –in my view- from the traditional stance towards “switching” in online markets; and (v) providing a new substantive assessment (paras 120 and 121, regarding conglomerate/cross-market effects) when the Decision’s wasn’t obviously valid.
Ends may perhaps justify means, but means create precedents.
Not that it’s of any consolation, but the Commission, and Microsoft too, have reasons to be as unhappy as we were with how things turned out. Ironically, the real winner of this case wasn’t even in the Courtroom.
Chillin'Competition 
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A comment on Case T-79/12 Cisco Systems and Messagenet v European Commission (Microsoft/Skype) (Chillin’ Competition) | 21st Century Competition
12 May 2014 at 9:17 am
Hi Alfonso,
I must confess I’m not as familiar as you are with all the inner workings of the Microsoft/Skype deal, the case before the Commission, or with the annulment proceedings that ensued before the ECJ.
However, and focusing on the more general aspects of the case, the following part of your first “rebuttal” to the ECJ’s judgment particularly stood out:
“The standard of proof must necessarily be higher in the case of Phase I decisions because the Commission has to prove that the case couldn’t objectively give rise to “serious doubts”.”
Not sure I’m entirely following your reasoning, but it looks like you’re arguing that a Phase I clearance would require proof of the *nonexistence* of serious doubts as to the transaction’s ability to significantly impede effective competition (SIEC, formerly limited to the creation or strengthening of a dominant position). Wouldn’t this result in a de facto presumption of “guilt” that would shift the burden of proof that there are no “serious doubts” on the applicant, if not in a diabolical proof altogether?
I know, I know: a company cannot seriously expect to get a complex transaction cleared without doing its best to convince the Commission that the deal won’t give rise to negative effects, but hey, it’s one thing that you do your best at proving your “innocence”, and different thing altogether to waive the Commission’s obligation to prove you’ll be (or are likely to be) a “bad boy”…
I agree that it seems intuitive to have different standards of proof in Phase I (“serious doubts as to compatibility with the [internal] market”) and in Phase II (SIEC) cases. However, I would also intuitively state that, if anything, the bar would actually be lower in Phase I cases, if only because the Commission lacks knowledge of the full facts at that stage — it simply doesn’t have all the evidence, which makes sense given that the outcome of a Phase I investigation is never an outright ban on the transaction, but at worst a less intrusive/harmful in-depth review that may even result in a clearance decision.
Isn’t that what, quite cryptically, AG Kokott writes in para. 211 of her Opinion in Impala?
I think it is at least worth considering how the standard of proof can be higher in Phase I (where not all the facts have been analyzed) than in Phase II, if, in AG Kokott’s own words, Phase I can only “force the Commission to make a more extensive investigation” whereas Phase II can result in a deal being prohibited.
When para. 211 is read in its entirety and in the context of the preceding paragraphs, I don’t think AG Kokott is even advocating for a “beyond reasonable doubt” standard strictly speaking, neither in Phase II incompatibility decisions nor in Phase I non-clearance decisions. This would require the Commission proving there is “no plausible reason to believe” that the deal won’t result in adverse effects on the market. I think where it all went wrong was with the implied double negations… In fact, the wording of Regulation 139/2004 casts a shadow of a doubt (excuse the pun) about this: “serious doubts” cannot possibly be equivalent to “beyond reasonable doubt” in any reasonable interpretation.
At the end of the day, how can anyone prove anything “beyond reasonable doubt” without having all the facts at hand, which only really become available in Phase II? I honestly believe she was referring to a preponderance of evidence standard — in order to determine whether to open Phase II proceedings, the question would be: is it more likely than not that a deal will be incompatible with the internal market? If it isn’t (and that requires less proof), then a Phase I clearance decision should be handed down. If it is (which requires more proof, but still less than a Phase II decision banning the deal), then there is a Phase II investigation.
A related question is whether there is any need to raise the standard of proof in Phase I in order to lower it for Phase II cases, which, by the way, seems like AG Kokott’s ultimate goal in Impala — to spare the Commission of a higher bar when justifying a Phase II prohibition decision.
This is what she writes in Para. 210 of her Opinion:
“Such a higher standard of probability would seriously weaken the Commission in carrying out its competition policy functions. The Commission would have to clear concentrations with open eyes even though they would probably lead to the creation or strengthening of a dominant position, and thus would have detrimental effects on competition. The Commission would be able to intervene only in cases in which such detrimental effects of a concentration would be ‘very probable’ or ‘particularly likely’. In addition, it would be difficult to reconcile a higher standard of probability with the margin of discretion allowed to the Commission in its assessment of complex economic situations, the essence of which includes the Commission’s prognosis as to how the market is expected to develop as a result of a concentration between undertakings.”
Again, if the bar can’t be as high as “beyond reasonable doubt” in Phase II cases because the Commission is dealing with the probability of future events (prognosis), how could it possibly be that high in Phase I, when the Commission lacks the evidence to do that prognosis?
Just my two cents!
Miguel
12 May 2014 at 6:08 pm
Hi again, Miguel, and apologies for the late reply (24 Court submissions yesterday -not kidding- is my objective justification..).
My two cents on your points:
First, there are two different concepts that generally get mixed up (I don’t mean by you, but by us lawyers, Commission and Courts). One is the “object” of the proof (i.e. what has to be proved) and the other is the “standard of proof” (to what degree you have to prove it). In the case of Phase I decisions, the Merger Regulation is quite clear that the “object” is “absence of serious doubts”. This is, I believe, uncontroversial. As the Court itself acknowledges in this Judgment, if the Commission has doubts it has no discretion and shall undertake an in-depth Phase II review.
So in reality, the Court may be right in ruling that the standard of proof is the same. The problem is that the “object” of the proof in each case is different (much more onerous in Phase I) and this means that “evidentiary threshold” should be higher in Phase I (because what has to be proved is different)
This had been uncontroversial in previous merger case law:
– Babyliss (T-114/02, para. 69): since “an in-depth market study is not carried out in Phase I”, the Commission had to demonstrate that the commitments were “sufficient to rule out clearly any serious doubts” as to whether effective competition would be significantly impeded.
– Esyjet (T-177/04, para. 129): “the Commission was entitled, without committing a manifest error of assessment, to take the view that [the proposed] commitments constituted a direct and sufficient response capable of clearly dispelling all serious doubts”.
You mention that “if anything, the bar would actually be lower in Phase I cases, if only because the Commission lacks knowledge of the full facts at that stage — it simply doesn’t have all the evidence, which makes sense given that the outcome of a Phase I investigation”. My sense is that these circumstances are precisely what justify the higher bar: the idea being that the Commission shouldn’t take an informed decision without knowledge of the full facts and enough evidence (that is also what Kokott says in para 210 of her Opinion in Impala). [On this, read also the case-law cited 5 paras below]
In other words, the Commission should only do away with the need to examine something thoroughlly only when it’s clear that it won’t pose problems. If you’ve doubts (theoretically an objective concept), then it should continue to investigate.
Now, do I think the standard of “proof” should be the criminal “beyond reasonable doubt” one? That’s what Kokott said, but probably that’d be asking to much. Nonetheless, I insist, the Commission should in any case prove (under the standard we choose: the Court has now said that the applicable one is the manifest error test) that it could not have had “serious doubts” (again the object-standard issue).
So what should that standard be? I guess in reality it shouldn’t be neither the “beyond the reasonable doubt one” nor the “manifest error” one. I would (and did) argue that all the right answers lie on the State aid case law:
The European Courts have noted that in its review of State aid the Commission may (…) restrict itself to the preliminary examination under Article [108(3)] [the equivalent of Phase I] (…) only if it is able to satisfy itself after the preliminary examination that the aid is compatible with the common market. If, on the other hand, the initial examination leads the Commission to the opposite conclusion or if it does not enable it to overcome all the difficulties involved in determining whether the aid is compatible with the common market, the Commission is under a duty to carry out all the requisite consultations and for that purpose to initiate the procedure under Article [108(2)]’ (emphasis added).
[As you will notice, this is the point I was making earlier in this comment]
In this sphere the Courts have also clarified that ‘the notion of serious difficulties is an objective one. Whether or not such difficulties exist requires investigation of both the circumstances under which the contested measure was adopted and its content. That investigation must be conducted objectively (…), comparing the grounds of the decision with the information available to the Commission when it took a decision on the compatibility of the disputed aids with the common market. It follows that judicial review by the Court of First Instance of the existence of serious difficulties WILL, BY NATURE, GO BEYOND SIMPLE CONSIDERATION OF WHETHER OR NOT THERE HAS BEEN A MANIFEST ERROR OF ASSESSMENT” (Caps are mine).
The State-aid case-law is also useful in discerning the circumstances that might point to the existence of ‘serious doubts’ or ‘serious difficulties’. In particular, the European Courts have found that evidence indicating the existence of serious doubts can be found, among other, wherethe Commission’s decision does not contain clear data supporting its conclusions on the circumstances, effects or goal of the measure; where there are evident contradictions between the documents explaining the measure and the decision authorizing such a measure; or where there is a link or resemblance between the measure at stake and other measures which in the past triggered the initiation of the investigation phase. [I´ve citations for all of these should you be interested]
Thanks for spurring an interesting debate which (given the lenght of our respective comments) we might be the only ones following!
Enjoy the sunny weekend..
Alfonso Lamadrid
17 May 2014 at 11:14 am
Interesting topic indeed, and the points you raise are certainly valid and well supported. Mine was an attempt to spark a debate, not on how this has been dealt with in the Microsoft case in particular, but on whether there may generally be reasonable alternatives from a legal point of view in dealing with the standard of proof that the Commission’s has to satisfy in its merger control decisions. And, of course, the role that these alternatives may have, if they do in fact exist, in ECJ rulings that constitute a shift in past practice.
Of course, I can’t discuss with what the current state of EU Law (through case law) is, nor is it my intention to do so.
However, I do have a couple of remarks on standard vs object of proof. In no particular order:
1. I cannot fully agree with using state aid cases in analogy to merger control cases. As a matter of principle, all state aid (that distorts competition and affects trade between Member States) is forbidden unless the scheme meets certain conditions (and is properly notified by the State in question and is reviewed by the Commission). We can therefore agree that the Commission has to prove that the measure won’t conflict with the internal market in order to clear it.
In merger control cases, however, there is no such blanket prohibition to start with. It therefore begs the question of whether it is legally reasonable that a Phase I clearance decision has to prove (to whichever standard) that no “serious doubts as to the compatibility of the [internal] market” exist.
2. Indeed, I believe there are two indications that the standard (and object) in merger control is different from state aid cases, and, within the former, between Phase I and Phase II decisions, the effect of which is a return to a more classical approach towards the proof of “innocence” and “guilt” than in state aid investigations.
a) Firstly, the consequences of not clearing a deal. While this would result in a prohibition decision in Phase II, in Phase I it would only give rise to further investigation, without prejudgment of the final decision. Quite similar, in my view, to Article 101 or 102 cases, by the way. That’s why I insist that, contrary to what AG Kokott seemingly defends in para. 211 of her Opinion in Impala, the standard to oppose clearance can’t be higher in Phase I than in Phase II, given that the consequences are less harmful to the applicant(s) in a Phase I non-clearance decision than in a Phase II prohibition decision.
b) Secondly, the wording of Article 6 of Regulation 139/2004 requires the Commission not to oppose a deal if it doesn’t have “serious doubts”. Clearly, the Commission does not have to make an airtight case to justify opening Phase II proceedings, it simply has to substantiate the existence of “serious doubts” that would require an in-depth analysis. But when looking at what the Commission has to “prove” in order to hand down a Phase I clearance decision, the opposite shouldn’t hold true under general principles of law: “proving” that the Commission has no “serious doubts” (note it’s not just doubts, but serious ones) with the evidence available at that stage is close to impossible, so someone could always argue that Phase I clearance should only be available to very limited white-listed instances, e.g. to non-overlap deals, or to transactions where the combined market share is de minimis (or almost). It is within legal reason to require proof of the serious doubts that’d trigger Phase II proceedings, i.e. to have to prove there are elements that point to adverse future market effects, but I query whether anyone can be made to prove (to whichever standard) that they have no doubts (serious or not) about the absence of those future effects. In the remit of infringement proceedings, this would equate to having to prove innocence (rather than guilt) beyond doubt… Furthermore, a literal interpretation of the EUMR should allow the Commission to clear a deal in Phase I even if it has doubts – so long as they aren’t serious doubts, that is.
In all, and as I say acknlowedging that case law currently stands as it is, the margin of discretion afforded to the Commission should be higher to clear than to oppose in Phase I. In other words, the Commission certainly has to substantiate its claims that a deal may negatively affect the market to move on to a Phase II investigation (though to a lower standard than in a Phase II prohibition decision), but shouldn’t be required to prove that nobody within DG Comp had a suspicion that the transaction could in the future lead to negative effects on the market. After all, how could it ever do so? Unless, of course, one advocates at the same time that only child-game transactions can be cleared in Phase I.
Well, that’s as much that a sunny Sunday in Lux will allow me to concentrate on competition matters, so I’ll leave it here!
Miguel
18 May 2014 at 2:12 pm
Good post. Thank you for your (in the circumstances, quite serene and objective) analysis.
colleague
12 May 2014 at 7:39 pm
I left out of the post 4 issues that are more of anecdotal than interesting points on substance, but still remarkable enough not to go unnoticed :
1) If you were surprised about the Commission’s and the Court’s change of views on switching, etc, take a look at this letter from Microsoft itself to the FCC in relation to the AOL/TimeWarner merger (which was authorized to interoperability remedies concerning IM): It said that
“Astonishingly, AOL still persists that there are no network effects in IM because the various services are (today) free and because IM users voluntarily sort themselves into small, homogeneous groups, thereby making it easy to switch”.
Sounds familiar, uh?
Replace AOL with Skype and IM with video call and you have a criticism to the very reasons why Microsoft now claimed the merger was ok, as kindly pre-formulated by Microsoft itself. This is another example of how not only markets but also opinions can evolve in a short time lapse 🙂
2) The Decision’s reinterpretation of the notion of conglomerate effects (para 203): “with regard to enterprise communication services a conglomerate assessment is not relevant since Skype is not active in these markets”.
? Hold on. Again, unless I’m missing something, aren’t conglomerate assessment appropriate precisely because the parties were mainly active in different markets??
3) Some comments to the Judgment have pointed out to the market shares of the main players in the enterprise world. Indeed, para 221 in fine of the Judgment says that in 2011 Lync’s share was 16% and Cisco’s 32%. It’s a pity that our discussion on market shares and the reports of independent consultants in this regard don’t made it to the Judgment. The reliance on those Microsoft-estimated shares was perhaps surprising given that (i) according to the Decision itself (para. 191), those estimates “do not seem to reflect Microsoft’s competitive strength in these markets” and (ii) if you read the Decision you’ll find it impossible to know what “enterprise communication market” those shares relate to (certainly not the “narrowest possible” enterprise market, certainly not the most likely one according to the recitals on market definition either, and certainly not one properly found by the Commission, which seemed to be a requirement for taking other market shares seriously).
And with this I’m done; other than exposing some issues for further reflection, I see no use in crying over spilt milk.
Alfonso Lamadrid
17 May 2014 at 11:22 am
Likewise, Miguel. I believe your attempt to spark further debate on a general point of interest has succeeded. You’ve also challenged me to reflect more on some of these issues.
I understand that the purpose of the debate is to try to find a sensible way to deal with standard/object of proof issues possibly without having to build on previous case law. I’m happy to have that debate since on this particular issue my opinions are not conditined by the case (we only put forward the argument to set the stage rightly and clearly, but the solution of the case didn’t at all depend on it).
With regard to your points,
1-.
The point you make to contest the validity of the State aid analogy is interesting, and it was also the reasoning used in the Judgment to deviate from that stream of case law. However and although I see what you mean, I’m not sure I’m fully persuaded.
In my view the Court gets its wrong when it says in the Judgment that State aid is presumed illegal unless authorized. Unless I’m wrong, the only State aid presumed illegal is non-notified aid, and no such presumption exists regarding notified aid (which, at most, and given that the Commisison’s silence equates to an implicit authorization, you could even argue is presumed compatible with the internal market). And since the 2nd Phase standard(threshold/case law applies both to notified and non-notified aid, the Court’s distinction doesn’t hold (again, in my perhaps non-objective view). That’s why I still think the reasoning undertaken in State aid cases could very well be applied here.
2-.
a) I see your point. Mine partly departs from the very same initial observation (that the consequences are different, and much less onerous in Phase II) but takes a different turn:
In Phase I the Commission isn’t only authorizing, it’s authorizing and concluding that a serious review (one that, among others, includes market definition) isn’t necessary. Even if Kokkot’s “beyond reasonable doubt” test may sound excessive, I do agree with the underlying logic, that the Commission should only be able to (not only authorize but also) decide not to examine something in-depth when it is confident and can show that this in-depth assessment wouldn’t be necessary.
Instead of comparing how onerous Phase I and Phase II outcomes are, let’s look at the situation from a different angle:
Observe that out of the two possible outcomes in Phase I, only one is definitive. In other words, clearance is a final non-reversible decision with immediate effecs on the market, whereas the opening of Phase II isn’t, it’s a simple intermediate step in the procedure with no effects on markets. Should the standard of proof be the same for final acts and for intermediate acts? I have serioud doubts about it !
b) You say: “proving” that the Commission has no “serious doubts” (note it’s not just doubts, but serious ones) with the evidence available at that stage is close to impossible”. I don’t think I agree on that one. Most mergers raise no problem, or at least no SIEC, and it shouldn’t be difficult for the Commission to prove that “beyond serious doubts”, as, in fact, it does in practice in the great majority of cases.
Those doubts would arise only if in order to authorize the Commission has to e.g. deviate from precedents, from its soft law, when the case is similar to others that raised issues in the past, or when certain issues (market shares or the objectives of the transaction, to mention only two, aren’t clear).
On a practical note, the Commisison’s assessment would be presumed to be right, unless a third part can show that there were objective reasons why the Commission should have had those serious doubts and, as you say, not merely doubts.
Admittedly, you’re probably right in saying that the endorsement of the test I propose (one that really holds serious doubts as an objective concept) could potentially could give rise to more Phase II reviews. Perhaps this idea also controbuted to the Court’s decision, and they may have had the impression -based on experience…- that Phase II examinations are already used too often.
3-
I come back to my earlier point: whereas Phase I clearance is a definitive decision with immediate effects on markets, the opening of Phase II is simply an intermediate step in the procedure. That, in simplified terms, is why I still would think (now contrary to the case-law) that the standard of proof applicable to one and the other shouldn’t be the same.
Thanks again for your excellent input and for the opportunity to think this through a bit more!
P.S. And if it makes you feel better, my first response was written also during a sunny Saturday morning (with my accompaniants repeating “do you really have to do that today??” 🙂 )
Alfonso Lamadrid
19 May 2014 at 12:22 pm
A wrong prediction :
– Commission decision in Microsoft/Skype:
para: 213. “A number of respondents to the market investigation also pointed out that by acquiring the critical mass of Skype’s users, Microsoft could create an exclusive, or preferential, interoperability between the Skype’s user-base and its Lync application”
paras. 217 and 220: “For the reasons above, the Commission concludes that Microsoft has no ability and no incentive to engage with Skype in such a strategy”
– Microsoft’s blog post from a few days ago announcing that “drawing upon the strengths of both programs, the next version of Lync will become Skype for Business” (…) “We believe that Skype for Business will again transform the way people communicate by giving organizations reach to hundreds of millions of Skype users outside the walls of their business,” (availablehttp://blogs.microsoft.com/blog/2014/11/11/skype-business-brings-best-skype-lync-due-2015/ see alsohttp://techcrunch.com/2014/11/11/microsoft-will-rebrand-its-lync-enterprise-communication-tool-skype-for-business/)
You could have rested your case..
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