Facebook, Inc. v The Competition and Markets Authority

JurisdictionEngland & Wales
CourtCourt of Appeal
JudgeSir Geoffrey Vos,Sir Julian Flaux,Lord Justice Phillips
Judgment Date13 May 2021
Neutral Citation[2021] EWCA Civ 701
Docket NumberAppeal Nos. C3/2021/0167 & 0168

[2021] EWCA Civ 701

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE COMPETITION APPEAL TRIBUNAL

Hodge Malek QC, Tim Frazer and Timothy Sawyer CBE

Royal Courts of Justice

Strand

London WC2A 2LL

Before:

Sir Geoffrey Vos, MASTER OF THE ROLLS

Sir Julian Flaux, CHANCELLOR OF THE HIGH COURT

and

Lord Justice Phillips

Appeal Nos. C3/2021/0167 & 0168

Case No: 1366/4/12/20

Between:
(1) Facebook, Inc.
(2) Facebook UK Limited
Applicants/Appellants
and
The Competition and Markets Authority
Respondent

Mr Robert O'Donoghue QC, Mr Gerard Rothschild and Mr Tom Pascoe (instructed by Latham & Watkins (London) LLP) appeared on behalf of the Appellants (“Facebook”).

Ms Marie Demetriou QC, Mr Ben Lask and Ms Emma Mockford (instructed by The Competition and Markets Authority) appeared on behalf of the Respondent (the “CMA”)

Hearing dates: 28 and 29 April 2021

Sir Geoffrey Vos, Master of the Rolls:

Introduction

1

Facebook's main ground of appeal turns on a relatively small point of statutory construction. It contends that the Competition Appeal Tribunal (the “Tribunal”) was wrong to construe the definition of “pre-emptive action” in section 72(8) of the Enterprise Act 2002 (the “2002 Act”), 1 as amended by the Enterprise and Regulatory Reform Act 2013 (the “2013 Act”), as extending beyond conduct that might prejudice the CMA's remedial options at the conclusion of a merger investigation or the investigative process itself. There was no basis for including “action that has the potential to affect the competitive structure of the market during the CMA's investigation” within the meaning of pre-emptive action.

2

The definition in section 72(8) provides that “pre-emptive action” means “action which might prejudice the reference concerned or impede the taking of any action under this Part which may be justified by the CMA's decisions on the reference”.

3

The CMA submits that pre-emptive action “encompasses both action which may impede or inhibit the CMA's final remedial powers, at the conclusion of the investigation, and action which the merging parties may take in connection with or as a result of the merger that alters the competitive structure of the market during the course of the CMA's investigation, but which may be irremediable at the conclusion of the investigation”.

4

This debate is taking place in the context of a merger between Facebook and GIPHY, Inc (“GIPHY”), completed on 15 May 2020, in respect of which the CMA made an Initial Enforcement Order (sometimes referred to as an “IEO”) on 9 June 2020. The CMA also appointed a Monitoring Trustee to oversee compliance with the IEO, and a Hold Separate Manager to ensure that the GIPHY business was preserved as a going concern and operated independently from Facebook.

5

Facebook paid some US$400 million for GIPHY, less than 0.5% of Facebook's annual turnover. GIPHY's business involved the production of a database of short soundless videos (GIFs) and stickers, which are GIFs with transparency at the edges. Most GIFs and stickers are accessed without charge through an Application Programming Interface (API) embedded into third party apps, such as WhatsApp, Instagram, TikTok or Snapchat.

6

As the Tribunal explained at [4], the 2002 Act provides for a two-stage review for completed mergers, generally referred to as Phase 1 and Phase 2, although those terms are not used in the 2002 Act. In respect of a completed merger, section 22(1) places the CMA under a duty in Phase 1 to decide whether or not to make a Phase 2 reference. In this case, the CMA decided to make a Phase 2 reference after the decisions that are challenged by Facebook in these proceedings.

7

Facebook itself summarised the main terms of the Initial Enforcement Order made against it and GIPHY broadly as follows:

i) General obligations on the merging parties not to take action which might prejudice the reference or action taken by the CMA under the 2002 Act, not to

integrate the GIPHY and Facebook businesses, not to impair the ability of the two businesses to compete independently, to ensure that the two businesses are carried on separately, to maintain the two businesses as going concerns, not to integrate IT systems or customer lists, and not to exchange sensitive information.

ii) Specific obligations applicable to Facebook's entire business, such as the obligation not to transfer any Facebook subsidiaries, not to make changes to the organisational structure of the businesses, not to make changes to the nature, description, range and quality of goods and/or services supplied in the UK, not to dispose of or encumber assets, not to make any changes to key staff, and to take all reasonable steps to encourage such staff to remain with the respective Facebook and GIPHY businesses.

iii) Facebook and GIPHY must certify their compliance with the IEO fortnightly and must keep the CMA informed of any material developments in the businesses.

8

Facebook also summarised the effect of its Carve-Out Requests of 10 June 2020 (the day following the IEO) as requesting that certain paragraphs of the IEO should:

i) Not apply to Facebook's business including those concerned with transfer of ownership, changes to organisational structure, restriction on dealing with assets, changes to and incentivising key staff; and

ii) Only apply to Facebook's business insofar as it related to the supply or procurement of GIFs, including those concerned with changes to product ranges and with reporting obligations.

9

Facebook complains that the CMA adopted an inappropriate and impractical approach in the correspondence that followed the Carve-Out Requests. Facebook contended that the IEO applied across hundreds of businesses and more than 50,000 employees worldwide. The restrictions “could not be rationally or proportionately justified to preserve an investigation into Facebook's merger with GIPHY which provides only one input into some elements of some of Facebook's services”. Most significantly, Facebook argued, and still argues, that “the Carve-Out Requests would still preserve the CMA's remedial options, since the most extreme remedy the CMA could impose … would be a wholesale divestiture of GIPHY, which would be preserved under the surviving provisions of the IEO”. Facebook also submits that the CMA misdirected itself in claiming that it was not in a position to determine the Carve-Out Requests until further information was provided about direct and indirect links between GIPHY and each aspect of the Facebook business at an entity-by-entity, department-by-department and workstream-by-workstream level.

10

On 26 August 2020, Facebook applied to the Tribunal for a review of the CMA's refusal to grant the derogations sought in the Carve-Out Requests on three grounds. It argued that the CMA's refusal to grant the Carve-Out Requests (i) was irrational and disregarded the statutory purpose of preventing pre-emptive action, (ii) was disproportionate, and (iii) infringed the requirement of legal certainty. The Tribunal rejected each of these three grounds.

11

Facebook now raises four grounds of appeal against the Tribunal's decision:

i) Ground 1: Statutory meaning of “pre-emptive action”: The Tribunal wrongly held that the CMA had power to regulate any activity that had the “potential to affect the competitive structure of the market during the CMA's investigation”, when it should have held that the CMA's powers were limited to taking measures to protect its investigation and potential remedies.

ii) Ground 2: Excessively broad Initial Enforcement Order: The CMA had no basis for freezing Facebook's business in order to preserve its remedies, because the most radical final remedy lawfully available to the CMA would have been to order a divestiture of GIPHY, which was preserved under Facebook's derogation request. In addition, the CMA's information requests were irrelevant, as they all went to the issue of which parts of Facebook's business should be included under the Initial Enforcement Order.

iii) Ground 3: Excessively broad specific obligations in the Initial Enforcement Order: It was neither rational nor proportionate to impose specific obligations, which applied indiscriminately to Facebook's entire global business. Facebook should have been released from these specific obligations, when it was already obliged not to take pre-emptive action and not to integrate with GIPHY.

iv) Ground 4: Disproportionate information requests by CMA: The relevant decision of the CMA was not a mere request for further information, but was disproportionate and, in effect, a decision to refuse the derogations sought.

12

The CMA's answer to these grounds of appeal is that the Tribunal was correct for the reasons it gave. More specifically, Ms Marie Demetriou QC, leading counsel for the CMA, submits that the statutory regime envisages a low hurdle as the trigger for an Initial Enforcement Order, because at that stage the CMA can have no information. Thereafter, the CMA did not refuse to grant the Carve-Out Requests, but asked Facebook to provide information so that it could understand whether the requests were appropriate. Instead of cooperating, Facebook “got on its high horse”, refused to provide any information and characterised the issue as one of principle. It argued wrongly that it was unlawful for the CMA to ask for the information, on the basis that Facebook's business did not overlap with GIPHY, so that the only remedy available to the CMA would be divestiture. Facebook argued, again wrongly according to the CMA, that a derogation had to be granted before Facebook provided information. The true...

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