UPS/TNT: General Court hits Commission's prohibition decision with blow

In brief

On 30 January 2013, the Commission blocked the proposed merger between UPS and TNT on the ground that the transaction would significantly restrict effective competition in 15 Member States as regards intra-EEA international express delivery services for small parcels. Upon appeal, the General Court annulled the Commission’s decision in its entirety on the basis of an infringement of UPS’ rights of defence. It found that the econometric analysis used by the Commission in its decision was substantially different from all the analyses that UPS was able to examine during the administrative phase. As the changes made by the Commission were non-negligible, the Commission should have communicated its final analysis to UPS before adopting its decision.

In detail

Prohibition decision UPS/TNT

In June 2012, UPS notified to the Commission its intention to acquire TNT (COMP/M.6570). In the EEA, both undertakings are active in the provision of small package delivery services, air and road cargo transport, freight forwarding and contract logistics. After an in-depth Phase II investigation, the European Commission prohibited the transaction in its decision of 30 January 2013.

The Commission’s investigation focused on the market for intra-EEA international express small package delivery services in one day. The main providers of these services are so-called “integrators”. As opposed to non-integrators, integrators have operational control over the whole logistics of the small package delivery from origin to destination (including air transport). In Europe, there were only four integrators: UPS, TNT, DHL and FedEx. The integrators face limited competition from non-integrators. Due to the lack of own air capacity, non-integrators (such as DPD and GLS) rely heavily on road rather than air transport, making it impossible to reach comparable efficiency or reliability. Furthermore, FedEx was considered only a weak competitive constraint to the other three leading integrators. Because of the lack of density and scale of its European air network, the offering of the smallest integrator was found to be more limited.   

The Commission considered that the merger between UPS and TNT would remove a close competitor in 15 Member States, reducing the number of competitors from four to three (with FedEx as a weaker third player) or even from three to two (with DHL as the only alternative to the combined entity). Hence, in the Commission’s view there would not have remained a sufficient amount of competitive constraint on the market, which, in all likelihood, would have led to price increases for consumers.

The efficiency gains submitted by UPS and TNT, such as cost savings through operational synergies, air network synergies and management and administration cost synergies, were considered insufficient to outweigh the negative effects on competition. Further, UPS was not able to offer remedies which could address the Commission’s concerns.

Annulment by the General Court

UPS appealed the Commission’s prohibition decision to the General Court, claiming, inter alia, that its rights of defence had been infringed (T-194/13).

According to UPS, the econometric model on which the Commission relied in its decision to calculate the effects of the merger on the prices in various national markets materially differed from all the versions exchanged with the Commission during the administrative procedure. As the Commission failed to hear UPS on this final analysis, it was not able to verify the results used in the decision and express its views on the appropriateness of the final changes made by the Commission. On the other hand, the Commission argued that it did not have to hear UPS on the final econometric analysis as it is entitled to revise or supplement the elements of fact or law set out in the statement of objections in light of UPS’ responses during the administrative procedure, provided that the decision sets out the same objections as those set out in the statement of objections.

The General Court sided with UPS. It found that the econometric analysis used by the Commission in its decision was indeed substantially different from all the analyses that UPS had been able to examine during the administrative phase. As the changes made by the Commission were non-negligible, the Commission should have communicated the final analysis to UPS before adopting its decision. By not doing so, UPS was unable to understand the analysis fully or verify the results derived from it.

The General Court concluded that UPS’ rights of defence had been infringed and annulled the Commission’s decision, not because the content of the decision might have been different, but based on the fact that UPS might have been better able to defend itself if it had received an insight in the final analysis used by the Commission.

Comment

The UPS/TNT case is interesting because it is one of the few prohibition decisions (in itself a rarity) which has been annulled by the EU Courts. The General Court has not annulled a Commission decision prohibiting a merger since the 2004 MCI Worldcom/Sprint case.

The General Court’s ruling is a warning for the European Commission to diligently take into account the rights of defence and due process in merger control proceedings, in particular by granting full access to the documents and models used during its investigations.

The impact of the General Court’s judgment on this particular case is however limited. After the UPS/TNT deal was prohibited by the Commission, FedEx offered to purchase TNT. On 08 January 2016 the Commission unconditionally cleared the acquisition of TNT by its smaller competitor FedEx (COMP/M.7630), equally after a Phase II investigation and on the basis of a similar assessment as in UPS/TNT. In FedEx/TNT, the outcome was different, because the Commission came to the conclusion that the merging parties were not close competitors and that a reduction from four to three operators by means of this transaction would not cause a significant impediment to effective competition on any relevant market.

UPS did not appeal the Commission’s decision approving the FedEx/TNT merger.