'But we don't even do any business in the UK…'
Published on 27th May 2021
Judgment on the appeal against a block on the Sabre-Farelogix deal highlights the slippery nature of the UK 'share of supply' jurisdictional test
The Competition Appeal Tribunal (CAT) has dismissed (21 May 2021) the application by Sabre Corporation for a review of the decision by the Competition and Markets Authority (CMA) to block its proposed acquisition of Farelogix Inc.
The tribunal, in Sabre Corporation v CMA, affirmed the regulator's jurisdiction to investigate the deal and made clear that the CMA has a wide discretion to construe the jurisdictional provisions of the Enterprise Act 2002 to the facts of a given case.
Sabre is a leading US technology and software provider to the global travel industry, operating a global system distributing airline content to travel agents for the purpose of booking plane tickets. Farelogix is also a US technology and software provider, supplying various technology solutions primarily to US airlines.
In November 2018, Sabre announced it had entered into an agreement to acquire Farelogix, and the deal was subsequently notified in the US and UK. While the US Department of Justice duly approved the merger (whose primary effects would be felt in the US), the CMA concluded that the transaction would result in a substantial lessening of competition in the supply of merchandising solutions to airlines on a worldwide basis and should therefore be blocked.
The question arose whether the CMA had legal jurisdiction to review the merger. Under UK merger control, the CMA only has jurisdiction where either the target entity has more than £70 million turnover in the UK or where the transaction gives rise to a combined share of supply of more than 25% of goods or services of a particular description. In this case, Farelogix did not generate any turnover in the UK at all, as it had no UK customers.
This did not prevent the CMA from asserting jurisdiction. Instead, noting that Sabre already had more than 25% share of supply in GDS services in the UK, the CMA found that Farelogix' technology was being used by British Airways (BA) through its "Oneworld Alliance" arrangement with American Airlines. This indirect usage was enough to create a UK nexus and thereby enable the "share of supply" test to be satisfied through marginally increasing Sabre's UK market position.
In May 2020, Sabre applied to the CAT for a review of the decision under section 120 of the Enterprise Act 2002, challenging the regulator's prohibition on six different grounds, four of which related to the validity of the CMA’s assertion of jurisdiction over the merger:
- Ground 1: the CMA had erred in law in its approach to identifying relevant overlapping services for the purposes of applying its "share of supply" test to what were two highly disparate suppliers;
- Ground 2: the CMA had erred in its approach to the jurisdictional requirement “supply in the UK” by conflating supply to an American airline of “FLX Services” (as defined by the CMA) with a direct supply to BA;
- Ground 3: the CMA had erred in its application of the share of supply test by (i) relying on an increment that was both hypothetical and vanishingly small and (ii) irrationally and in error of law applying different and inconsistent methodologies in respect of Sabre and Farelogix and so failed to compare like with like; and
- Ground 4: the CMA had erred in its calculation of the total supply of the relevant overlapping services in the UK by failing to apply its definition consistently or rationally to third party providers.
In its recent judgment , the CAT dismissed all of Sabre's arguments that the CMA did not have jurisdiction to review the deal between the two US companies. The tribunal confirmed that the application of the share of supply test is a matter of judgement for the CMA and that it has a broad discretion in determining the criteria used.
CMA's approach upheld
The CAT unanimously held that matters regarding construction of the Enterprise Act are for the CMA to determine and that the regulator has the power to construe the relevant law to the particular facts of the case. While the tribunal is bound to apply judicial review principles when reviewing the way in which the CMA has applied the facts, where the regulator’s assessment involves matters of expert economic judgment, the CAT has to defer to the CMA’s assessment.
CMA has a wide discretion in defining services of the same description
The tribunal found that – provided that the "share of supply" test is met – the UK has jurisdiction over the impact of the merger on markets in the UK. It further noted that Sabre had not identified any error of law in how the CMA had identified the relevant overlapping services (ROS). The CAT declared that section 23(8) of the Act (which sets out the criteria for deciding when services can be treated as services of the same description) provides the CMA with a broad discretion when identifying services of the same description and when distinguishing them from services of a separate description.
Given the breadth of the CMA's discretion, Sabre's challenge can only be a challenge to the rationality of the CMA's choice of the relevant overlapping service. In assessing this matter, the tribunal held that the regulator's approach to defining the overlapping services by reference to common functionality as between services provided by merging parties “cannot be regarded as irrational”.
Indirect supply by Farelogix to a UK entity is sufficient to constitute 'supply in the UK':
Sabre's second ground for appeal related to the fact that the CMA found in its final report that Farelogix supplies the ROS in the UK to BA. Farelogix argued that there was no direct contract between Farelogix and BA, but only a contract to supply FLX services between Farelogix and American Airlines (which was simply a member of the "Oneworld" airline alliance, alongside BA).
The tribunal held that the relevant issue was whether the CMA erred in concluding that Farelogix made a supply of ROS in the UK and, in particular, whether it made a supply to BA. The question for the CAT to answer was whether the CMA's conclusion that there was a supply by Farelogix, via American Airlines, to BA was unreasonable (irrational). The tribunal held that it was satisfied that BA had received a supply of FLX services from Farelogix in the UK.
So long as the combined share of overlapping services is more than 25%, any increment is sufficient
Thirdly, Sabre argued that the CMA erred in its application of the share of supply test, in that it misconstrued section 23 of the Act in relying upon an increment that was both hypothetical and vanishingly small. According to the CAT, the overriding question here was whether the CMA had erred in concluding that the merger would result in an increment in the merged entities’ share of supply of the ROS in the UK.
The tribunal held that the agency’s contention that part of the revenue received by Farelogix from the fee paid by American Airlines was attributable to the provision of FLX Services under the BA agreement was not irrational, thereby rejecting Sabre’s arguments. According to the tribunal, Sabre's argument that the value was only hypothetical was based purely on the fact that Farelogix had not enforced the right to payment because the practical costs of collection outweigh the sums receivable, which does not mean that there is no supply of value. It further noted that the underlying right to payment remains the same, regardless of why the revenue which is receivable is not in fact received.
CMA had not acted irrationally in excluding certain services
Lastly, Sabre argued that the CMA erred in its calculation of the total supply of ROS in the UK by failing to apply its own definition of ROS consistently or rationally to third-party providers. While the tribunal noted that it “had concerns” in relation to the CMA’s analysis in relation to metasearch and non-vertically integrated travel operators, ultimately it decided that the CMA's conclusions in relation to those services which it excluded from the ROS were not irrational or otherwise liable to be set aside on judicial review grounds.
Osborne Clarke comment
This much-anticipated legal battle has been closely observed by legal professionals interested in understanding the limits of the CMA's jurisdiction. In a post-Brexit world where the UK will potentially have jurisdiction over many large transactions that were formally the exclusive preserve of the European Commission, this question is of considerable importance.
In recent years, the CMA has acquired a reputation for taking a flexible and, indeed, imaginative approach in applying its "share of supply" test, whether by identifying seemingly arbitrary sets of overlapping goods or services or looking only at small geographic localities in order to find a basis for seizing jurisdiction.
This recent CAT judgment confirmed that the application of the "share of supply" test is a matter of judgement for the CMA and that it has a broad discretion in determining the criteria used. Although, at first sight, Farelogix had no direct British airline customers (or any UK customers at all), the CMA asserted jurisdiction on the basis of Farelogix’ supply to American Airlines and, consequently, to BA through the Oneworld Alliance arrangement between the two airlines. The CAT's decision has only given the CMA more comfort that it can continue with its flexible approach to jurisdiction going forward.
This judgment can be seen as supporting many practitioners' long-held view that the UK "share of supply" test is a highly slippery concept that the CMA is willing to use to its advantage if it wants to review a particular merger. It also reinforces the view that the UK merger control system is "voluntary" only from the regulator's perspective, making it very difficult for practitioners to provide any legal certainty to businesses that the CMA will not have jurisdiction over a given deal.
Many practitioners had hoped that the UK merger control system would be comprehensively overhauled as part of Brexit – perhaps introducing a mandatory notification for deals over a certain size, but coupled with a simplified and quick initial review process solely intended to identify those deals meriting a full investigation. While the CMA has issued comprehensive new guidance, which (amongst other things) sets out how the CMA intends to work proactively with the European Commission on large-scale international mergers, it has stopped short of reforming the rules.
As things stand, the UK retains the crown for having one of the most expensive and cumbersome merger control regimes in the world, where obtaining Phase 1 clearance within six months is deemed a swift outcome. The inherent uncertainty of the "share of supply" test, as reinforced by the CAT's latest decision, adds to the burden on merging parties. At the same time, the sheer cost and complexity of the notification process deters businesses from notifying borderline deals which perhaps ought to be brought to the CMA's attention.