Meta's UK court fight over Giphy deal will test merger regulator's tough approach

The first UK prohibition of a Big Tech deal will be tested in court next week as Meta Platforms fights to get an order requiring it to unwind its purchase of Giphy quashed.

The challenge will shed light on whether the Competition and Markets Authority's tough vetting of acquisitions by digital giants is legally watertight or judges feel the regulator needs to be reined in.

Meta, which is appealing the CMA’s decision on six grounds, will tell the Competition Appeal Tribunal that the watchdog breached its powers and acted out of all proportion when it blocked the purchase of Giphy, a provider of short animated videos typically in GIF format.

Past challenges at the CAT have almost all ended in failure and given weight to the idea that the CMA has wide jurisdiction to intervene, but tech companies concerned about the regulator’s growing reach will be watching closely for any evidence of an appetite by judges to trim its powers.

Unwinding order

Meta saw its completed acquisition thwarted last November over the CMA's fears that it would reduce competition between social-media platforms and had already removed Giphy as a potential challenger in the display-advertising market.

Specifically, the CMA concluded that Meta would be able to increase its already significant market power in relation to other social-media platforms in two ways.

The first would be by denying or limiting other platforms’ access to Giphy's GIFs, driving more traffic to Meta-owned sites — Facebook, WhatsApp and Instagram — which already account for 73 percent of user time spent on social media in the UK. Meta has said that half of Giphy’s traffic comes from its apps, with half of that from Instagram alone.

The second way, the CMA said, would be by changing the terms of access by, for example, requiring TikTok, Twitter and Snapchat to provide more user data in order to access Giphy's GIFs.

It also found that, before the merger, Giphy had launched innovative advertising services that it was considering expanding to countries outside the US, including the UK. The CMA said these had the potential to compete with Meta’s own display-advertising services.

The deal is still under review in the US and Australia, while in Austria the national competition regulator last month challenged its clearance by the Vienna Higher Regional Court in February.

Appeal grounds

“The decision to block the deal is wrong on the law and the facts, and the evidence does not support the CMA's conclusions or remedy," a Meta spokesperson said this week, adding that the deal would "improve Giphy’s product" and provide "more choices for everyone.”

Meta's six grounds of appeal all relate to what it sees as the CMA’s failure to use the right standard to determine whether the merger was anticompetitive.

First, it claims that the CMA’s final decision doesn't find it probable that Giphy would have become a meaningful competitor to Meta in advertising in the UK market and, if such a reasoning was found, it couldn't have been without reasonable prior inquiries or assessments.

The second ground of appeal relates to market power, and specifically that the CMA’s findings contradict its definition of the relevant market in which Meta competes. “Logically, Giphy’s paid alignment advertising must either compete in the same market as [Meta’s] advertising or in a different market,” it said.

Meta claims that if Giphy’s advertising competes in a different market to Meta’s, then the CMA’s view that the merger could remove an important advertising rival does not stand up. But if the parties compete in the same advertising market, this would contradict the CMA’s definition of display advertising, Meta claims.

“The finding that [Meta] has market power is based upon a definition of the relevant advertising market which no rational decision maker could have reached consistently with the other findings in the decision,” Meta said.

Ground three alleges that the CMA’s counterfactual does not rationally follow on from its findings and has been developed “without the respondent having taken reasonable steps to acquaint itself with plainly relevant information or make necessary factual findings.”

Ground four alleges that the CMA acted unfairly and in breach of its duty in connection with its disclosure of and evaluation of the consequences of material information. In October, Meta accused the watchdog of withholding critical information from it during its probe, which amounted to a "fundamental flaw" as the regulator couldn’t get feedback on the information in question. Withholding the information denied the company the right to a fair hearing, Meta added.

The details of what exactly was withheld are redacted, but Meta has claimed that the information had been known by the CMA almost throughout its 15-month investigation but that it was only made available 13 days after the release of its provisional findings following a disclosure request.

Ground five alleges the CMA failed to properly assess the remedy that it would have imposed for its vertical competition finding in isolation, beyond the divestment of Giphy.

Ground six alleges that the regulator acted irrationally and/or disproportionately in determining the remedy for the substantial lessening of competition it found.

High stakes

For a CMA merger decision to be overturned by the CAT is exceptionally rare, as judges there are generally deferential to the watchdog’s assessment and the appeal is bound by a judicial review standard. This means that the regulator's decision will be allowed to stand unless it is shown to have been somehow illegal, irrational or procedurally flawed.

So far, only one company, JD Sports, has managed to reverse a CMA merger decision, but even the impact of this was limited. Following a successful appeal, the CAT ruled in November 2020 that the CMA had acted irrationally in its review of JD Sports’ acquisition of Footasylum by failing to follow up on inquiries about the impact with Footasylum suppliers or its primary lender.

The tribunal quashed the CMA’s final report and sent it back for fresh consideration, deeming that the effects of Covid-19 should have been of "material importance" to its overall decision.

After redoing its investigation this year, the CMA again ordered JD Sports to sell off Footasylum. It found that despite increased competition from companies such as Nike and Adidas, and the impact of Covid-19, Footasylum would remain in good financial health.

Tough regulator

The CMA’s increasingly tough merger stance has been well documented, and the watchdog’s outgoing chief executive Andrea Coscelli has led the fight against a perceived underenforcement of Big Tech deals. In 2019 he warned that the five largest tech companies had bought more than 400 companies over the last decade, with only a handful of deals attracting any competition scrutiny and none being blocked.

That same year the watchdog commissioned a report by Italian consultancy Lear which found that past reviews had been over fearful of uncertainty.

In recent months the CMA has blocked deals that have been cleared in other jurisdictions. It has also made it clear it would have opposed Google-Fitbit, a merger that was reviewed and cleared with concessions under the European Commission’s one-stop-shop policy. The policy no longer applies to the UK as a result of Brexit.

This background suggests that Meta will have a hard task to convince the CAT that the regulator was wrong or over-reached. Its decision to push ahead now paves the way for the clearest analysis yet of the extent of the CMA's powers to scupper a global tech merger.

Meta's appeal is due to start at the CAT on Monday and last four days.