CAT dismisses Facebook application and confirms CMA's wide interim order powers

In a unanimous judgment, the Competition Appeal Tribunal ("CAT") dismissed Facebook's application challenging the CMA's refusal to grant certain derogations from an initial enforcement order ("IEO") imposed in connection with Facebook's completed acquisition of GIPHY, Inc.

On 13 November 2020, the CAT handed down a unanimous judgment dismissing Facebook's challenge against CMA's refusal to grant derogations from an IEO imposed by the CMA in June 2020 in connection with Facebook's completed acquisition of GIPHY, Inc.

While the UK merger control regime is voluntary, and businesses can complete transactions without receiving merger clearance from the CMA, if the CMA has jurisdiction and decides to intervene it can impose an IEO for the purpose of preventing pre-emptive action which might otherwise restrict the CMA's ability to secure remedies at the conclusion of its merger review.  Parties are able to request derogations from the IEO to take actions that would otherwise be prohibited.

• The CMA imposed an IEO on Facebook on 9 June 2020.  On 10 June 2020, Facebook's legal advisors submitted a request for five urgent derogations from the IEO, including a request that the scope of certain provisions of the IEO be restricted so that they would only apply to the part of the Facebook business relating to the procurement/supply of GIFs and stickers (the "Carve-out Requests").  The CMA considered that it was unable fully to consider the Carve-out Requests on the basis of the information and submissions provided and asked Facebook to provide further information.  The CMA maintained its position following further correspondence with Facebook's solicitors and, on 26 August 2020, Facebook lodged an application with the CAT to review the CMA's refusal/delay in granting the derogation on the grounds that it was:

• irrational and disregarded the statutory purpose of preventing pre-emptive action;
• disproportionate; and
• infringed the requirement of legal certainty.

The CAT dismissed the application on all grounds, and was critical of Facebook for, in its view, not engaging effectively with the CMA.  Key points which can be drawn from the CAT's judgement are set out below.

Scope of the CMA's power to impose IEOs is wide

• The CAT considered that the statutory purpose of IEOs to avoid pre-emptive action is wide; pre-emptive action is a broad concept, which is not limited exclusively to the efficacy of any remedies which might need to imposed following conclusion of the merger review. In particular, it includes action which 'might' prejudge a Phase 2 reference, including action that has the potential to affect the competitive structure of the market during the CMA's investigation. The CAT noted that the use of the word 'might' implies a relatively low threshold of expectation as the CMA is at an early stage of its investigation.
• As the statutory purpose of an IEO is precautionary, the CAT confirmed the CMA has a considerable margin of appreciation. In order to impose an IEO, the CMA is not required to have formed a view that it is likely that prejudice to the Phase 2 reference will materialise or that there will be an impediment to the CMA’s remedial options; a risk or a possibility is enough.

The CMA is entitled to seek further information when assessing derogation requests 

• The CAT agreed that, in considering derogation requests, an information asymmetry exists between the merging parties and the CMA. The CMA is therefore under a duty to acquaint itself with relevant information to enable it to assess whether there is a risk of pre-emptive action, and it is not required to accept assertions made by the parties without further verification. Where the CMA decides that it requires further information, it has a wide margin of appreciation to decide what information is needed.

Co-operation is vital 

• A key theme of the CAT's judgment is that merging parties seeking derogations from an IEO should take a constructive and cooperative approach in engaging with the CMA.
• It is incumbent upon the parties to co-operate with the CMA, particularly when making derogation requests. Derogation requests need to be fully specified, reasoned and supported by relevant evidence.
• While the CAT made it clear that it was not expressing any view on whether Facebook had breached the IEO, it did note that it was "unsatisfactory" that Facebook effectively proceeded on the basis as though its derogation request had been granted (by submitting its fortnightly compliance statements, as required by the IEO, accompanied by significant qualifications). While the CAT noted that Facebook appeared to have good grounds for submitting that the IEO was unnecessarily wide and burdensome, it considered that the approach Facebook which followed was "high-risk" and did not enable the CMA to decide which derogations were appropriate. The CAT was critical of Facebook's lack of engagement with the CMA and failure to provide the CMA with the information requested so far as possible.

Clarification should be sought from the CMA 

• As regards the claim by Facebook that the wording of the IEO was unclear, the CAT held that it is a document that is clear in itself and that the template is familiar to those dealing with IEOs. It recognised that, as with any definitions incorporating terms such as "reasonable steps" or "ordinary course of business", there may be some uncertainty when looking at the margins. However, the CAT noted that in cases where there is such uncertainty, it is open for parties to seek clarification from the CMA.

In conclusion, the CAT found that the CMA acted rationally in deciding that it would not determine the derogation request without further information, and that the CMA's request for information to determine the request was not disproportionate, or in breach of the requirement of legal certainty. 

The CAT's decision shows that the exercise of a broad statutory discretion will not be lightly second-guessed by the courts.  It also emphasises that it is critical for merging parties to engage early and constructively with the CMA in relation to derogations where an IEO might be imposed.  This is particularly important for merger parties given that the CMA has the power to impose fines of up to 5% of global groupwide turnover for breach of an IEO.

As previously noted in our newsletter, the CMA has increasingly taken a tougher stance on compliance with its IEOs.  As noted in the September 2020 edition of our newsletter, in August 2020 the CMA imposed a fine of GBP 300,000 on JD Sports and its parent company Pentland Group Limited for failure to comply with its IEO, although this penalty was subsequently withdrawn by the CMA in light of "issues raised on appeal" by JD Sports.

With thanks to Natasha Gromof of Ashurst for her contribution.