In its judgment of 21 May 2021 the Competition Appeal Tribunal (“CAT”) upheld the CMA’s approach in applying the share of supply test to assert jurisdiction over Sabre’s acquisition of Farelogix, (with the CMA ultimately prohibiting the transaction following an in-depth investigation). The CAT confirmed that the CMA has a broad discretion when applying the share of supply test and can use any criteria it considers appropriate in the circumstances of the case, in order to decide whether goods or services of the same description are supplied or acquired by the merging parties in the UK.
Applying standard judicial review principles (i.e., assessing whether the CMA had proceeded rationally in its decision-making, rather than assessing the merits of the case) the CAT upheld the CMA’s jurisdictional findings. It agreed with the CMA that the required UK nexus was met despite Farelogix not having any customers in the UK, simply on the basis of its supply to American Airlines which had an interlining agreement with a single UK customer, British Airways (“BA”). The share of supply test also requires there to be an increment in the supply of the relevant goods or services as a result of the merger and although Farelogix did not receive a fee from BA, the CAT held that there was a contractual right under which it was entitled to receive payment and that was sufficient for the test to be met. The CAT also confirmed that the CMA does not need to identify a numerical value for the increment and that there is no ‘de minimis’ threshold for the increment under the test.
Even where the CAT had concerns in relation to the CMA’s analysis, in respect of the definition of certain third-party supplier services it excluded from the relevant services, it found that the CMA’s conclusions were not irrational.
Practical implications of the judgment
Over the last few years the CMA has taken an expansionist and creative approach in applying the share of supply test in order to take jurisdiction where it wants to review a particular merger. The CMA adopted a similar approach in Roche/Spark Therapeutic where it found that the companies overlapped in the provision of treatments for haemophilia in the UK, despite Spark’s products still being in the pipeline, so not having a commercialised product. The CMA found a UK nexus because Spark, a US company, held certain UK/EU patents and had some employees undertaking R&D activities in the UK. Roche/Spark Therapeutic was cleared unconditionally by the CMA, therefore the CMA’s jurisdictional assessment in the case was not challenged.
In the CMA’s ongoing Facebook/Giphy investigation, Facebook also argues that the CMA has not yet set out a plausible basis for taking jurisdiction over the transaction. It argues that Giphy has no sales in the UK, no assets and no employees and that there are no overlapping services between the parties. The CMA believes that the parties overlap in the supply of GIF databases or GIF search capabilities, but Facebook does not have a GIF database or GIF search capabilities and claims that the CMA “has twisted itself in knots and is unable to put forward a plausible case”.
The CAT’s ruling in Sabre will further encourage the CMA’s expansionist approach in taking jurisdiction over any transaction it wants to review. Businesses considering a deal which has minimal revenues in the UK and only a tangential UK nexus will therefore nevertheless need to consider the impact of the UK merger control regime and engage early with the CMA where necessary. Although the UK regime is a voluntary regime, the CMA can investigate a merger that falls under its jurisdiction, including a completed merger, and make a reference for a detailed investigation up to four months after completion of the transaction is made sufficiently public. This is likely to result in significant delays and additional costs to the deal and may impact on post-closing integration as the CMA will routinely impose hold-separate measures to prevent further integration while it is carrying out its investigation. As recently confirmed by the CAT in an appeal bought by Facebook, hold separate measures imposed by the CMA may apply to the worldwide businesses of an acquirer and target (with merging parties required to seek derogations to limit the scope of these measures).
Background – CMA’s jurisdiction based on the share of supply test
Sabre, a US-based company headquartered in Texas, provides technology solutions to airlines and travel agents. It is one of the three largest global providers of IT systems used by airlines and travel agents to sell airline tickets. Farelogix is a smaller but innovative and disruptive US-based competitor headquartered in Florida, providing technology solutions to airlines. Under the transaction Sabre was to acquire the whole issued share capital of Farelogix for approximately $360 million. The rationale for the deal was to expand Sabre’s airline technology portfolio and accelerate its strategy to deliver next-generation retailing and distribution solutions.
The CMA took jurisdiction over the transaction on the basis of the share of supply test set out in section 23(2)(b) of the Enterprise Act 2002 (“EA 2002”) as Farelogix’ turnover was below £70 million. The share of supply test is met where, as a result of the enterprises ceasing to be distinct, the combined entity will supply or acquire 25% or more of goods or services “of a particular description” in the UK or a substantial part of it. Where an enterprise already supplies or acquires 25% of the goods or services the test is satisfied as long as its share is increased as a result of the merger, regardless of the size of the increment.
The test is very flexible and provides the CMA with a wide discretion in describing the relevant goods or services. Section 23 provides that for the purpose of the test the CMA can apply any criterion, or combination of criteria, including “value, cost, price, quantity, capacity, number of workers employed or some other criterion, of whatever nature” as it considers appropriate. Services or goods are supplied in the UK where they are provided to customers who are located in the UK. There is no requirement for the merging parties to be legally incorporated in the UK for this part of the test to be met.
During its in-depth investigation the CMA considered the relevant description of services (“RDS”) for the purpose of the share of supply test to be “IT solutions for the purpose of airlines providing travel services information to travel agents, to enable travel agents to make bookings“. Sabre supplied the RDS through its global distribution system, which distributes airline content to travel agents for the purpose of booking airline tickets. Farelogix supplied the RDS by indirectly supplying one UK airline, BA, in respect of one type of itinerary (interline segments). The parties submitted that this agreement did not create a customer relationship because the agreement was necessary to provide one of BA’s alliance partners – American Airlines – with the ability to use Farelogix’s technology to communicate with BA’s booking systems in order to allow it to sell BA tickets. The CMA disagreed and concluded that the merger would have resulted in an increment of Sabre’s share of supply for such services in the UK.
To calculate the parties’ share of supply to BA, the CMA relied on the number of bookings made through BA’s indirect distribution channels. On this basis, the CMA found that Sabre’s share of supply of services to BA that facilitate the indirect distribution of airline content was between 30-40%. The indirect distribution services provided by Farelogix to BA were found to constitute only a small post-merger increment. This small increment was however sufficient for the CMA to conclude that the share of supply test was satisfied.
The parties argued that it was inappropriate for the CMA to determine that the share of supply test is met based on sales to a single airline customer. The CMA disagreed noting that it has a wide discretion in describing the relevant goods and services for the purpose of determining the scope of the share of supply test. It also added that BA’s bookings accounted for a substantial portion of all UK airline bookings and that BA is the flag carrier airline of the UK and its procurement choices are liable to have a material impact on UK consumers.
On 9 April 2020, the CMA issued its Final Report finding that the acquisition by Sabre of Farelogix, if carried out, would result in a substantial lessening of competition (“SLC”) in the supply of merchandising solutions and the supply of distribution solutions to airlines on a worldwide basis. The CMA blocked the merger on the grounds that it would stifle innovation and competition.
Sabre’s appeal and the CAT ruling
Although the transaction was abandoned following the CMA’s decision to block the deal, Sabre filed an appeal with the CAT which focused on four grounds relating to the CMA’s “unlawful” application of the share of supply test. Two further grounds, on the correct application of the standard of proof and on the CMA’s SLC finding in relation to distribution, were subsequently withdrawn. The CAT dismissed Sabre’s appeal in its entirety.
Relevant description of services
Sabre challenged the CMA’s description of the RDS on the basis of two highly disparate supplies, in the absence of any underlying rationale. While recognising the CMA’s flexibility under the share of supply test, Sabre argued that the legislation requires the CMA to identify the specific criteria that provide a rationale for grouping two products together, not simply a statement from the CMA that the RDS encompasses both.
The CAT held that the CMA had neither erred in law nor reached a conclusion that was irrational. It had identified the criteria required under section 23(8) EA 2002 and had properly applied its Merger Guidance on Jurisdiction and Procedure (“Guidance”). The CMA’s Guidance makes it clear that there is no need for the RDS to correspond with “a standard recognised by the industry”, nor is there a requirement for the description to be “commercially recognisable”, as long as there is evidence of common functionality and of perception they are commercial alternatives.
It concluded that the CMA’s RDS was reasonable and that the CMA had given adequate reasons for its conclusions.
The relevant version of the Guidance at the time of the investigation was the CMA’s 2014 Guidance, which has recently been updated and now incorporates additional paragraphs confirming the CMA’s wide approach in applying the share of supply test in Sabre/Farelogix and in other recent cases (CMA2 revised December 2020).
Sabre argued that the CMA erred in its approach to the requirement under the share of supply test for “supply in the UK“, erroneously conflating Farelogix’s supply to a US airline of FLX services with a direct supply to BA.
The CAT however agreed with the CMA that, as a result of the agreement with BA, the UK airline receives an IT solution which allows it to sell interline segments through FLX services, which enables the transfer of its travel services information to the travel agent. In this way BA receives the supply of FLX services from Farelogix in the UK. BA’s internal documents also demonstrated that BA management had taken a conscious decision to procure Farelogix’s services, a procurement decision that was taken in the UK.
Increment to market share
Sabre also argued that the CMA had erred in its application of the share of supply test in identifying an increment that was both hypothetical and vanishingly small and was based on inconsistent methodologies and thereby failed to compare like for like.
The CAT confirmed that for the share of supply test to apply there needs to be an increment in the share of supply as a result of the merger, but that there is no “de minimis” threshold and that any increment, no matter how small, is sufficient for the test to be met.
Sabre had a pre-existing market share of more than 25%. Farelogix had never charged BA any form of fees for interline tickets, therefore it had not received any revenues in relation to the 62 interline bookings BA had made. Nonetheless, the CAT agreed that a share of supply increment could be attributed to Farelogix based on the existence of a contractual right to payment, which it had not enforced because the practical cost of enforcing it outweighed the sums receivable. The CAT held that does not mean there is no supply of value, as the right to payment remains, regardless of why the revenue which is receivable was not received. It concluded that it was open to the CMA, on the facts of the case, to conclude there was an increment in the share of supply, and that decision was not irrational.
Exclusion of third-party suppliers from RDS
Finally, Sabre argued that the CMA had erred in its calculation of the total supply of RDS services in the UK by failing to apply its own definitions of RDS consistently or rationally to third party providers.
The CAT agreed with Sabre that once the RDS services were defined it was up to the CMA to apply the definition consistently to services supplied by third parties. Although the CMA no longer had a broad discretion in this regard as the RDS were now defined, this exercise still involved the application of the criteria to the particular facts of each service in question, with some element of evaluative judgment.
While the CAT had concerns in relation to the CMA’s analysis in relation to two types of services it excluded from the RDS, it was ultimately satisfied that the CMA’s conclusions were not irrational or otherwise liable to be set aside on judicial review grounds.