Meta/Giphy court judgment: The CMA’s controversial merger analysis survives, but its procedures don’t

As readers of this blog know, the UK’s Competition and Markets Authority (“CMA”) blocked its first Big Tech merger in the Meta/Giphy case. Meta duly appealed to the UK’s Competition Appeal Tribunal (“CAT”) and the CAT’s judgment was issued last week.

The most discussed element of the case has been the CMA’s controversial theories of “dynamic competition”. These theories were on trial and they have been upheld by the CAT with – believe it or not – “no hesitation”.  As Simay Erciyas and I argue in a recent article on this case, the CMA has given itself the ability to block almost any merger it chooses to.

As we expected, the CAT has now given the CMA the legal cover it needs to continue its interventionist merger control approach. However, the CAT’s judgment has a sting in its tail. The CMA was found to have run an unfair process by failing to give Meta sufficient opportunity to see the relevant evidence and therefore defend itself. This will have ramifications for the CMA’s merger processes in future.

UK merger appeals

The UK’s merger appeals system is a difficult one for aggrieved merging parties. Appeals are only possible on judicial review grounds, which assess the legality (including the rationality) of the CMA’s decision.  As the CAT says, “[i]t is our task not to consider whether the CMA has “got it right”, but whether the decision it made was lawful or not” (para 125 of the Judgment).

And even if the appellant wins, the case is merely sent back to the same decision-making panel at the CMA to re-decide. Those panels rarely decide a case differently the second time around unless something significant has changed.

Dynamic competition

Much of the case focused on the CMA’s reliance on the concept of “dynamic competition”, which were cemented in the CMA’s assessments by the revised Merger Assessment Guidelines (the “MAGs”) that were published in March 2021. Dynamic competition is defined as follows:

“… existing firms and potential competitors can interact in an ongoing dynamic competitive process, and a merger could lead to a loss of dynamic competition. Firms that are making efforts or investments that may eventually lead to their entry or expansion will do so based on the opportunity to win new sales and profits, which may in part be ‘stolen’ from the other merger firm. Incumbent firms that are making efforts to improve their own competitive offering may do so to mitigate the risk of losing future profits to potential entrants. In this sense, potential entrants can be thought of as dynamic competitors, even before they effectively enter and begin supplying customers. A merger may reduce the incentives of dynamic competitors to continue with efforts to enter or expand, or the incentive of incumbent firms to mitigate the threat of future rival entry or expansion. The impact of such a reduction in efforts would affect customers in the present, rather than solely from the future point in time when entry or expansion has occurred.” (MAGs, para 5.3)

Dynamic competition is essentially the CMA’s answer to concerns that too many ‘killer acquisitions’, and other acquisitions of potential competitive threats by firms with market power, have been allowed. In other words, if Meta was buying Instagram today, it would be blocked on dynamic competition grounds.

It was therefore Giphy’s future potential that was being removed by the merger, rather than its present day conduct. We have covered the CMA’s theories in this case in a previous blog post, so we will not repeat ourselves. The important thing that has now changed is that the CAT has fully endorsed these theories. The CAT concludes that it has “no hesitation in concluding that the decision made by the CMA was one that it was entitled to make” (para 126 of the Judgment).

The CAT quite helpfully sets out its thoughts on a good framework for dynamic competition assessments. This is a helpful steer for the CMA in future cases. The CAT only has two minor requests for future cases:

• because these types of theories require difficult questions of judgment, the CMA should spend more time in future cross-checking its analysis: “Accordingly, for the future, in cases of dynamic competition, we would find it easier to review decisions on a judicial review basis if the CMA were consciously to ask itself: ‘What is the position if your assessment of the impairment to dynamic competition is wrong?’” (para 128 of the Judgment); and
• despite the CAT being certain that the CMA has the jurisdiction to block a merger between two foreign businesses, the CMA should consider principles of international comity in cases involving international businesses: “in international cases, regard needs to be had (even if it is not determinative or even immaterial) to the wider context” (para 129 of the Judgment).

These requests will not be difficult to fulfil and the CMA will feel fully vindicated.

An unfair process

The CMA had made redactions from the Provisional Findings and the Final Report, which restricted Meta’s ability to understand the case against it and make intelligent submissions in response. These redactions were to protect the confidential information of third parties, particularly Meta’s competitors such as Snap, which had purchased Gfycat.

However, the CAT found that, “[t]he excisions to the Provisional Findings were unlawful and cannot be justified by reference to the regime in the Enterprise Act 2002” (para 158 of the Judgment).

The CAT emphasised that consultation with the merging parties is a necessary part of due process: “The addressees of a decision and any other persons affected by a decision are entitled to understand exactly the basis on which the decision is made, and the decision-maker must stand by and defend the decision it has made, and not some variant that leaves bits out” (para 148(2) of the Judgment).

In making its redactions, the CMA had failed properly to balance the degree of sensitivity of the third party data (and therefore the potential harm to those parties of making the disclosure) against the necessity of disclosing the data to allow the merging parties to defend themselves. The Enterprise Act requires such a balancing act to be performed, but the CAT found that the CMA had focused too much on protecting third party data and disclosing it only to Meta when the third party gave consent for it to do so.

The CMA should have considered a confidentiality ring whereby the data is disclosed to the parties’ external counsel who have a professional obligation not to disclose the data to their client (para 157(12)). The CAT said that the CMA had failed to distinguish between: (1) the necessity of disclosing information to the general public in the published versions of the documents, and (2) the necessity of disclosing information to Meta, which was the party affected by its merger decision and who deserved greater transparency.

The CAT also suggests that the CMA should have first considered a confidentiality ring involving Meta staff, which seems odd to me. Meta’s staff are precisely the people who would cause the third parties commercial harm and therefore are the people in the world from whom the third parties would most wish to withhold their data – if a confidentiality ring needed to include them, the data could simply have been published on the CMA’s website.

Para 157 of the Judgment (which lasts for six pages and 12 sub-paragraphs) will be one that merger control practitioners will come to know by heart, and the CMA will quickly become sick of it being quoted at them in every case.

Rolling the CMA’s merger processes back a few years

The CMA will be upset about losing on a procedural ground of appeal. It will also be upset about the stridency of the CAT’s criticism.

It has been trying to reduce the burden of its investigations by streamlining the procedural steps and therefore by restricting the merging parties’ ability to disrupt it. This is particularly important for the CMA now that it is investigating more of the largest multinational mergers post-Brexit. Confidentiality rings are burdensome for the CMA case team.

However, the CMA might want to take this judgment on board by looking at its Phase 2 merger processes more holistically. Some practitioners argue that the CMA’s streamlining has gone too far, and I believe this point is implicit in the CAT’s judgment. If the CMA is going to pursue such an aggressive line towards mergers, with no right of appeal on the substance of a case, then it needs to act like it wants to give the merging parties a fair chance to contribute during the investigation.

At present, merging parties sometimes say that the process feels prosecutorial rather than inquisitive. They do not have the opportunity to contribute their industry expertise to the CMA’s evidence gathering strategy. For example, they may not know to whom the CMA has spoken, how respondents to customer or competitor surveys are chosen, what questions they are asked, and what they each said to the CMA. The parties do not have substantive meetings with the CMA to discuss how the economic theory of the case might be framed and tested. In the formal main party hearing, the CMA asks questions of the parties, but it does not involve an open two-way discussion between merger control experts. The CMA sends some working papers to the parties, but the extent of these has been scaled back considerably. The parties are then provided with a fait accompli in the Provisional Findings, at which point it is not plausible for the CMA to redesign its evidence base even if the parties were to make some valid criticisms. They may still not know what respondents were asked, and who the CMA has spoken to, because the Provisional Findings only summarise the gist of the evidence.

It was not always like this.  Several years ago, the parties often had substantive meetings with the CMA case team, including two-way discussions between the parties’ economists and the CMA economists.  They were discussed the questions that were sent out to customers, sometimes pointing out reasons why a certain question would be misleading to an industry participant because of the wording used. The parties were provided with detailed summaries of customers’ and competitors’ hearings with the CMA. They were given working papers of detailed prose so that they could examine the chains of reasoning and respond prior to the provisional decision being taken. At the Provisional Findings stage, the parties’ external counsel and economists were sometimes provided with third party information in a confidentiality ring so that they could see the full basis for the CMA’s reasoning.

Running these complex Phase 2 merger investigations is far from straightforward and the CMA is battling with companies like Meta that have effectively unlimited resources. However, while the CAT’s Meta/Giphy judgment is about disclosure rather than the process more generally, this might be the time for the CMA to roll the clock back a few years. If the CMA wishes to streamline its processes, I would argue that the Initial Enforcement Order regime is the better place to start. The burden of that regime sucks the resources of both the CMA and the merging parties away from substantive issues.

What happens next?

The CMA and Meta must now make submissions to the CAT about what should happen next. Given that the CAT has no ability to impose its own decision on the outcome of the merger, and it will be reluctant to hypothesise about whether Meta’s submissions on the redacted information would have changed the CMA’s decision, I don’t see an alternative but for the CAT to send the case back to the CMA to re-consult and then re-decide.

Readers can make up their own minds about whether anyone will benefit from the CMA going through the procedural motions and then inevitably prohibiting the merger again. Third parties to the merger certainly won’t benefit. They now risk their confidential information ending up in the hands of Meta (a gatekeeper with plenty of scope to retaliate against them commercially), and will incur costs in corresponding with the CMA on the subject.

In the meantime, the CMA is in a difficult situation. It has recently prohibited mergers and issued adverse provisional findings using what has now been found to be an illegal process. A recent prohibition in the helicopter services sector is still within its appeal period and therefore the merging parties might even be drafting an appeal following the CAT’s judgment. The CMA may be breathing a sigh of relief that the appeal period for Cargotec/Konecranes has expired – in this case, the CMA and the European Commission issued divergent decisions on the same facts and have had to deal with the political fallout.

More generally, as discussed in a previous blog post, this CAT judgment arguably affects the scope of the new regulatory regime for Big Tech in the UK. The CMA had asked for a reduced standard of proof under the forthcoming special mergers regime, which would have made it easier for the CMA to block Big Tech acquisitions. The UK Government has recently decided against doing that, and the CAT’s endorsement of the CMA’s aggressive merger analysis under the existing regime makes this seem like a wise decision. The CMA does not seem to need a reduced standard of proof in order to intervene in Big Tech mergers.

[Disclosure: Tom was previously Legal Director at the CMA where he was closely involved in writing the revised Merger Assessment Guidelines referred to above.]