Month: December 2015

Société Coopérative de Production SeaFrance SA v The Competition and Markets Authority and Another, [2015] UKSC 75

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I just came across an interesting Judgement by the Supreme Court of United Kingdom on mergers delivered recently on 16.12.2015 titled Société Coopérative de Production SeaFrance SA v The Competition and Markets Authority and Another, [2015] UKSC 75 (Hat tip to SCC Online) wherein it has been observed that the merger control provisions of the Enterprise Act, 2002 are not limited to the acquisition of a business that is a “going concern” but would include even the acquisition of the assets of a defunct business. According to the Court, “An enterprise is subject to merger control if the capacity to perform those activities as part of the same business subsists.”

 

BACKGROUND TO THE APPEAL

SeaFrance SA, a French company, operated a ferry service between Dover and Calais until it ceased operations on 16 November 2011. It was formally liquidated on 9 January 2012, and most of its employees were dismissed. Groupe Eurotunnel SA (“GET”), the parent company of the Group operating the Channel Tunnel, and Société Coopérative De Production SeaFrance SA (“SCOP”), a workers’ co-operative incorporated by a number of former SeaFrance employees to secure the continuance of the ferry service, acquired substantially all of SeaFrance’s assets on 2 July 2012. This included three of the four SeaFrance vessels, trademarks, IT systems, goodwill and customer lists. GET and SCOP resumed ferry services on 20 August 2012 through GET’s subsidiary company, MyFerryLink SAS. The vessels were operated by employees who had almost all worked for SeaFrance. The reemployment of those employees had been incentivised by a statutory Plan de Sauvegarde de l’Emploi (known as the PSE3), by which SeaFrance’s parent company SNCF would provide payments to employers for employing ex-SeaFrance employees.

The acquisition was referred to the Competition Commission, the regulator at the time. It concluded that there was a “relevant merger situation” for the purpose of the merger control provisions of the Enterprise Act 2002, which could be expected to result in a substantial lessening of competition in the cross-Channel market. The “enterprise” of SeaFrance continued since its “activities” continued, even though there had been a hiatus of over seven months in its operations. The Commission imposed restrictions on the operation of the service by GET and SCOP, including a ban on using the exSeaFrance vessels for ferry services from Dover for 10 years. On appeal to the Competition Appeal Tribunal, the Tribunal gave guidance on the meaning of “enterprise” in the Eurotunnel I judgment, and remitted the question of jurisdiction back to the new regulator, the Competition and Markets Authority.

Upon the remission, the Competition and Markets Authority (which had assumed the functions of the Commission) considered that what had been acquired was an “enterprise”, and therefore that a “relevant merger situation” existed. Accordingly they confirmed the restrictions previously imposed by the Commission. That decision was upheld by the Competition Appeal Tribunal in the Eurotunnel II judgment.

The Court of Appeal allowed an appeal by a majority, holding that GET and SCOP had not acquired an “enterprise”, but only the means of constructing a new (but similar) one. In particular, this was because they had not acquired SeaFrance’s crews. They concluded that it was irrational for the Competition and Markets Authority to reach any other conclusion on the facts.

 

REASONS FOR THE JUDGMENT

The merger control provisions of the Enterprise Act 2002 are not limited to the acquisition of a business that is a “going concern”. The possession of “activities” is a descriptive characteristic of an enterprise under the Act. An enterprise is subject to merger control if the capacity to perform those activities as part of the same business subsists. [32-35]

The test is one of economic continuity. An Acquirer acquiring assets acquires an “enterprise” where (i) those assets give the Acquirer more than might have otherwise been acquired by going into the market and buying factors of production and (ii) the extra is attributable to the fact that the assets were previously employed in combination in the “activities” of the target enterprise. The period of time between cessation of trading and acquisition of control of the assets may be a relevant factor, but is not necessarily decisive. [36-40]

This was substantially the same principle set out by the Competition Appeal Tribunal in Eurotunnel I, which the Competition and Markets Authority applied in this case. [40-41]

The Court of Appeal’s finding that the Authority’s evaluation was irrational was unjustified. GET and SCOP acquired substantially all the assets of SeaFrance, including trademarks, goodwill, specialist vessels maintained in a serviceable condition, and substantially the same personnel. The Authority’s conclusion that this demonstrated “considerable continuity and momentum” and “the embers of an enterprise”, which could be passed to GET and SCOP, was unimpeachable. The order of the French Court of 9 January 2012 to dismiss the employees did not disrupt that continuity and momentum because the order was made on terms that the PS3 preserved the prospect of employment on the ships for the dismissed crew members. [41-43]

The majority of the Court of Appeal was wrong to narrow the question of economic continuity to the legal effect of the decision of the French Court in January 2012 and whether this terminated the employment relationship between SeaFrance and its employees. The Competition and Markets Authority is not entitled to any special level of deference: the test for determining whether there is a “relevant merger situation” and relevant “activities” is a legal question. [31] But the Authority undertook a broader economic analysis, concluding that there was economic continuity. That evaluation was complex and sensitive to a whole range of factors. It was not a purely legal enquiry. Its economic analysis should be respected. [44-45]

References in square brackets are to paragraphs in the judgment

 

When one goes through Section 5 of our own Competition Act, 2002 as well as the definition of the term “Enterprise” under Section 2(h) of the Act, there appears scope for a similar dispute to arise in our own jurisdiction in the future. The definition of the term “Enterprise” under Section 2(h) also does not contemplate any such merger or acquisition of a defunct organisation. Yet, this happens on a frequent basis in the Indian corporate sector, albeit since individual transactions are on scales relatively small, they avoid triggering the C.C.I. combination process.

T.R.A.I. Consultation Paper on Differential Pricing for Data Services (A.K.A.) What Has Now Become The Fight Over “Free Basics”. (Part – I)

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At the very outset, it must be stated that the Supreme Court Winter vacations have a tendency to induce one into a hibernating lethargy (in my case, lying tucked in bed with two blankets, a book and a halogen heater), which is the reason this post has taken such a long time to finally come to an end and be published. (For those who may not have understood by now, I am a true summer fan and sincerely dislike winter !!)

While this delay has allowed me to observe and note the developments in the past few days which have taken place regarding the issue, i.e., the “Free basics” fight which has broken out between Facebook and internet freedom activists, it has also at the same time forced me to expand this post to include a discussion on “Free Basics” as a service and whether it can actually help the citizens of India or not.

Coming first to the T.R.A.I. Consultation Paper on Differential Pricing for Data Services, the first question which immediately springs to mind is:- WHY ?? This issue was specifically raised and discussed in the previous T.R.A.I. Consultation Paper On Regulatory Framework for Over-the-Top (O.T.T.) Services (see page 98 onwards, specifically pages 106 – 107) wherein the agreement between Facebook and Reliance (earlier known as “Internet.org” and now reincarnated as “Free Basics”) was specifically discussed and comments on such pacts were called for (Question 13 in the earlier Consultation Paper). Therefore, it makes little sense to release another brand new Consultation Paper to exclusively once again discuss an issue, the responses to which are going to be obvious and the same as they were before. Surprisingly, there is absolutely no mention in the Differential Pricing Consultation Paper about the previous O.T.T. Consultation Paper, which again makes no sense considering the similarity of the issue.

Taking the liberty to speculate, there can only be two reasons for this move by T.R.A.I. One, the T.R.A.I. is in a genuine quandary on “Zero Rating” and is hoping for clarity on whether to allow such services, and this might also explain why it has failed to release its recommendations on the O.T.T. Consultation Paper till date. OR two, it has already taken a decision to allow Zero Rating plans by treating them out of the umbrella of network neutrality but which will be subject to regulation by it and the purpose of the present Paper is only to develop a working regulatory model on consensus.

However, whether one likes it or not, a new separate Consultation Paper on Differential Pricing for Data Services does now exist, and therefore warrants a look, even for those who oppose it.:-

  1. On reading, one can notice that this Consultation Paper focuses more from a perspective of regulation of tariffs. The first three paragraphs of the paper are a clear indication of the direction which T.R.A.I. wants the debate to take,i.e. the debate is being steered away from the one on network neutrality to that of viability of tariff regulation.:

“1. The Telecom Regulatory Authority of India Act, 1997 empowers the Authority to notify tariff for various Telecommunication Services. In exercise of this power, Telecommunication Tariff Order, 1999 (TTO, 1999) was notified for the first time on 9th March, 1999. Amendments in the TTO, 1999 were issued from time to time to reflect the changes in tariff framework. Initially, the tariffs were regulated. However, as the market matured and competition increased, TRAI gradually moved towards a ‘forbearance’ regime and forborne the tariffs for the wireless and the wire line segment in 2002 and 2003 respectively. Currently, except for the national roaming, rural telephony and leased lines, the tariffs for other telecommunication service are under forbearance. As per the policy of ‘light-touch’ regulation being followed, the tariff framework provides the Telecom Service Providers, which include Internet Service Providers and Data Service Providers (hereinafter referred to as TSPs) the freedom to design the tariffs according to the prevailing market conditions.

2. While the tariff regime has been left to forbearance, regulatory oversight is required so that the tariff framework follows the broad regulatory principles elaborated hereafter. Thus, TRAI needs to regularly watch and review the tariffs prevalent in the market. TTO provides for filing of tariffs by TSPs within seven working days of launch. The tariff filing provision plays a critical role in enabling TRAI to scan the prevalent tariff landscape and effectively intervene, wherever required to ensure that the tariff offers are reasonable, transparent, non-discriminatory and are not anti-competitive.

3. The TSPs have the flexibility to decide various tariff components for different service areas of their operation subject to the reporting requirement and other regulatory guidelines in vogue. Tariffs are offered by the TSPs taking into account several factors including input costs, level of competition, commercial considerations 2 and individual business case for each service provider. Even though tariff forbearance and flexibility to the TSPs to determine the rates are core principles of tariff framework, several regulatory guidelines have been prescribed to ensure orderly growth of the telecom sector and protection of consumer interest. Prevention of discriminatory tariff offers and ensuring transparency in tariff offers are amongst the most important principles which the Authority has consistently endeavored to uphold.”

2. Paragraph nineteen provides a fair and reasonable solution to the problem of differential pricing which should be acceptable to clans both for and against “zero rating”. It suggests de-linking free internet access from specific content, and instead limiting it by volume or time. This is a viable solution to the debate and should be eagerly pursued by T.R.A.I. in order to prevent future disputes and litigation on the issue. (The Airtel offer of fifty percent internet “cashback” if used after midnight is an example of such a scheme.)

3. The Paper obviously focuses on mobile data services, which brings us to the larger issue which even western jurisdictions, particularly the E.U., have had to pay extra attention to with regard to mobile network neutrality. (The link is an excellent paper by Christopher Marsden on the issue published in the European Journal of Law and Technology). In India, this assumes further significance since the trend in internet penetration is now confirmed to progress in the hinterland through mobile connectivity. A more detailed discussion will follow during our analysis of “Free Basics”.

 

In the next post, I will focus on “Free Basics” and discuss the merits and demerits of the scheme being actively promoted by Facebook.