UPS-TNT verdict exhorts EC to engage with economists and sets scene for damages fight
16 January 2019. By Nicholas Hirst, Andrew Boyce and Lewis Crofts.
Do econometric modeling, do it rigorously and share your work with the companies before you, Europe's top court told the European Commission's merger-review authority today, as it confirmed that a 2013 veto of UPS's takeover of TNT Express was void.
The judgment is the latest to boost the role of economics in competition cases and, by affirming that regulators breached UPS's procedural rights, sets the scene for UPS to argue its claim for 2 billion euros in damages from the commission.
While that action will be more complex, requiring the EU courts to engage more closely with regulators' evidence and reasoning, the company will take heart from the way the European Court of Justice has already highlighted apparent inconsistencies in the regulator's logic.
Today's judgment upheld a lower court finding that the commission infringed UPS’s defense rights by making changes to its econometric model without informing the parties.
In dismissing the commission’s appeal against that decision, the EU's top court confirmed that such changes should not have been made without “being brought to the attention of the undertakings concerned and allowing them to submit their comments.”
The EU judges scolded the commission, noting that although the changes were made "more than two months before the adoption of the [final] decision," the EU executive had not explained why it would have been "impossible in practice, at that time, to give UPS a short deadline for it to comment on the final version.”
— Objective econometrics —
At the very least, that confirms that if investigators engage with the economics in a merger, they must do so diligently.
A spokesperson for the commission said it had already acted on the guidance provided by the General Court following UPS's victory before the lower court, and had striven to "give the parties ample and sufficient opportunities to comment and respond" to economic analyses.
Nonetheless, lawyers for merging parties will say this ruling raises the bar for EU officials to share their working with economists at every turn.
It could increase the burden on investigators, who will be all too aware that any false move — even just on a procedural matter — can bring the whole house crashing down.
Yet the judgment appears to go further, underlining the important role that econometric modeling can play in merger reviews.
Such assessments, the court noted, are "by their nature and purpose" an "appropriate" means for the commission to project the future effects of a merger.
Use other means at your peril, the court seems to be saying.
— Damages —
In its judgment, Europe's top court also felt it necessary to remind the commission that such models must be "objective" so as not to "prejudge" the outcome and undermine "trust" in EU merger reviews.
The question of whether the analysis on UPS-TNT was objective will loom large in the claims brought by UPS and Irish aviation firm ASL, which had agreed to buy TNT Airways.
After the General Court annulled the prohibition decision, UPS filed an appeal at the General Court in December 2017, seeking 1.742 billion euros (around $1.9 billion) in compensation. ASL is suing for 263.6 million euros.
In the meantime, UPS's arch-rival Fedex bought TNT after receiving unconditional approval from the commission and selling TNT Airways to ASL.
— Inconsistencies —
In determining the commission's liability to UPS and ASL, the General Court will have to grapple with the evidence and assess whether, leaving aside the procedural error, regulators were right to block the merger on competition grounds.
That will likely entail a grueling assessment of the decision's more than 2,000 paragraphs, its economic reasoning, and the evidence underpinning it.
Today's judgment seems to offer some guidance in that regard, as it noted apparent inconsistencies in the commission's use of certain variables in its econometric model.
The commission might respond that, in the absence of the econometric models, the deal would still have been blocked given its effect on competition in the Danish and Dutch markets. That was a line it used to try to dismiss UPS's appeal.
Yet after today's judgment, the General Court judges may well ask: how could you predict that without relying on such models?