Microsoft v CMA - when the 'Final Report' isn't the last word.

The Competition Appeals Tribunal ruling of 17 July 2023 granting an adjournment (1590/4/12/23 Microsoft Corporation v Competition and Markets Authority - Ruling (Second Adjournment Application) | 17 Jul 2023 (catribunal.org.uk) was made conditional on receipt of a witness statement from Chris Prevett (Prevett 2) and a submission by Microsoft.

While the latter is not public, the former is now available on the Tribunal's website (1590/4/12/23 Microsoft Corporation v Competition and Markets Authority - Non-confidential version of the second witness statement of Mr Prevett (for the CMA) | 20 Jul 2023 (catribunal.org.uk) and contains some statements that warrant... closer inspection.

Prevett 2

In his witness statement, Mr Prevett submits that (paragraph 6(a), Prevett 2):

1) the CMA has a duty - under section 41(3) EA 2002 - to hear submissions from merging parties on possible material changes in circumstance that may warrant a departure in the Final Order (under section 84 EA 2002) from the decision set out in the Final Report (under section 36 EA 2002); and

2) this duty includes taking account of a proposal by the Acquirer, having had its deal prohibited by the CMA, to re-notify another version to the CMA as a new 'relevant merger situation' (under section 33(1) EA 2002), thereby triggering a new merger investigation.

Whoa, what just happened?

I have to confess that I had to read paragraph 6(a) a few times, not least because I have always - along with I expect most other practitioners - treated the CMA's Final Report as the final say on the matter (and the Final Order as for the most part a technicality). You know - the negotiation of remedies and maybe fix-it-first - that all happens before the Final Report, right?

No! In fact, paragraph 6(a) of Prevett 2 - at its broadest - would render the Final Report merely "Provisional Findings v2.0", against which merging parties can now provide further submissions, either with the objective of a more favourable Final Order or, in extreme cases, the commencement and re-hearing of a new merger investigation altogether (in doing so, incidentally, largely vitiating the purpose of a CAT appeal, which, at its height, results in a remittal of the case to the CMA for re-consideration).

What are we to make of this?

The CMA will apply a 'high legal standard' to 'material change of circumstances'

Paragraph 11 of Prevett 2 explains that: "In my experience, submissions of this nature are very rare given the high legal standard to meet any test for material change of circumstance or special reason under s.41(3) EA02 (as exceptions to a legal duty), and the relatively short period between the publication of a final report and the making of the final order." [emphasis added]

I underlined the above phrase because, while there was no case law, decision or guidance citation for the legal standard referred to, it was clearly leading to a view that that standard may be met in this case.

What might satisfy this 'high legal standard'?

Prevett 2 refers to just two points made by Microsoft in its "20-page" submission following the Final Report (paragraphs 11 - 15, Prevett 2):

1. the EU Commission has since accepted Microsoft's commitments with regard to licensing Activision games, which will be subject to an enforcement mechanism; and
2. the CMA's decision to prohibit goes beyond restrictions necessary to protect cloud gaming services in the UK, noting that the transaction is a global one.

Ok, two big 'material changes' there, right?

Not really:

• Microsoft already provided the 'Microsoft Cloud Remedy' to the CMA as part of its negotiations before the Final Report was adopted, the CMA was well aware of the EU process, and knew about the intended enforcement mechanisms... and the CMA rejected all of these proposals outright in the Final Report.
• The fact that the CMA's decision to prohibit the deal would have extra-territorial effect was already acknowledged by the CMA (see, for example, paragraph 10 of the Final Report) in its decision to proceed to prohibit.
• Although Microsoft may argue that the issue of proportionality and extra-territoriality is heightened in a scenario where only the CMA has prohibited (and the FTC has been unsuccessful), Prevett 2 (paragraphs 29 and 30) makes clear that the FTC process is irrelevant to the CMA's decision in this case..

So, nothing really new so far.

Prevett 2 then refers to a third potential material change, not referred to by Microsoft in its submission, being that Microsoft has entered into an agreement with Sony (paragraph 17, Prevett 2).

As for this:

• Microsoft's agreement with Sony relates mostly to console gaming (where the CMA didn't find a concern, but the FTC was focussed on); and
• for cloud gaming, Sony isn't a significant player in cloud and the CMA roundly declined to rely on such agreements as part of a remedies package in its Final Report.

So, again, possibly a 'change' but a 'material one' for the purposes of section 41(3) EA 2002? Doesn't appear so..

The big one (you know, where the wheels come off?)

So, feeling a little short-changed, we now get to the fourth and final possible 'material change' justifying both (i) the CMA's extension of time for making the Final Order and (ii) the Joint Application to the CAT for adjournment.

This is the real kicker, namely, that Microsoft intends to submit a new transaction to the CMA for a fresh merger review (paragraphs 19 - 22, Prevett 2).

But here the CMA is conflating two separate concepts: (i) material change (under Section 41(3) EA 2002) of an extant reference as a basis for adoption of a revised Final Order; and (ii) abandonment of the old merger (under section 37(1) EA 2002) and notification of a new merger (under section 33(1) EA 2002), and muddied the waters quite considerably in the process.

If the route to resolution is to be a material change of circumstance under Section 41(3) EA 2002, warranting a change to the Final Order under Section 84 EA 2002, it must properly be (i) an actual material change and (ii) relevant to the merger, as notified. As explained above, there are no obvious material changes that would warrant a departure from the Final Order, just rehashes of points already made in the original process, or in the case of the Sony deal, developments barely relevant at all to the issue at hand. The only real change, the lack of success by the FTC in Court, has been ruled out as irrelevant in Prevett 2. And one has to wonder whether it is appropriate to accept a new remedy proposal as a 'material change', when the period for discussion of remedies expired before the Final Report was issued.

If the intention instead is to abandon the merger as notified to the CMA (and notify a 'new' one, with a fix-it-first UK-specific carve-out, or similar), we are not in material change territory / Kansas any more, and the provisions of Section 37 EA 2002 come into play: the CMA may simply cancel the reference altogether (without the need to make any order under Section 84 EA 2002 since, at that point, there is no reference to finally determine). It would then be for Microsoft to notify a new transaction to the CMA and for the CMA to decide whether to clear at Phase 1 with commitments, or carry on to Phase 2. In either eventuality, the existing review is rendered irrelevant (along with any subsidiary order-making) and, incidentally, the appeal would also fall away as soon as the existing notification was withdrawn.

Putting lipstick on a pig?

A more respectable course in this case might have been for the CMA to accept - as Mr Justice Marcus Smith, President of the Competition Appeals Tribunal, suggested - a no-fault remittal and look again at its approach to behavioural remedies, and for Microsoft to offer a little more in terms of UK-specific protection. On a read of Prevett 2, this is quite clearly what is going to happen anyway - effectively a remittal in all but name.

Instead, the CMA appears to now be telegraphing that (i) the Final Report is not always the final word, (ii) the threshold for material changes between Final Report and Final Order may be very low (and could include improved remedy proposals); and (iii) if you don't like the Final Report, you can always withdraw your merger entirely, re-notify and start again.

Quite apart from the rights and wrongs of this case, and the need for a speedy resolution, the CMA must have an eye firmly on its reputation, at home and abroad, and the risk that a novel approach in this case may have to the need for certainty in future reviews.

Would a voluntary remittal, in comparison to this, have been so bad?