Bloomberg Law
June 16, 2022, 9:00 AM

ANALYSIS: UK Court Agrees That CMA Can Squash Meta/Giphy Merger

Eleanor Tyler
Eleanor Tyler
Legal Analyst

The Competition and Market Authority’s decision to unwind Meta Platforms Inc.‘s merger with Giphy Inc. was substantively sound, but due process defects may require the agency to repeat the proceeding, a UK court said June 14.

The Competition Appeal Tribunal, on appeal of the antitrust watchdog’s final order against Meta, upheld the reasoning and the remedy in the CMA’s November decision. Its opinion effectively extends the CMA’s reach in merger cases, particularly in markets that are fast-moving or nascent—which could be important to digital mergers going forward.

However, the Tribunal may have also made it more difficult for the CMA to manage third-party information it gathers in the course of an investigation—which may be tricky for the agency in future investigations.

Deal Undone

Meta (at the time, Facebook) bought Giphy for $315 million in May 2020. Giphy is one of two companies that supply GIFs for use in online communications: Basically, when you choose a GIF on a social media platform, you are likely using one from either Giphy or its primary rival, Tenor Inc. (owned by Google).

Both Meta and Giphy are based in the US, so it raised a few eyebrows when the CMA investigated the merger despite Meta’s insistence that there was no nexus to the UK. The CMA determined last year that the merger was anticompetitive because it would likely impact: (1) “the supply of display advertising in the U.K. due to horizontal, unilateral effects arising from a loss of dynamic competition,” and (2) the supply of social media services worldwide because Meta could vertically foreclose its rivals from accessing Giphy’s services.

The second theory should be familiar to most competition lawyers: Vertical mergers can be problematic when they allow one company to capture a critical supplier, then hurt rivals by denying access to that supplier or selling to them on much worse terms. The first ground, however, is more novel. The CMA concluded that Giphy was working on entering the display advertising market, where Meta is a dominant player, and thus could have created a more competitive market for advertisers in the UK but for the merger.

Dynamic Markets

The CMA ordered Meta to divest Giphy, and Meta appealed that decision to the Tribunal in December 2021. Meta contended that, in essence, the CMA made up the market in which it found that Meta and Giphy compete (or would compete). Meta argued that, instead of looking at markets as they exist or will in the immediate future, the CMA’s decision postulated “dynamic markets” that don’t yet exist and may never exist. Meta argued that CMA can’t be allowed to foresee some future market—without some current market activity to lean on—and use that prediction to halt a merger in the present.

In response, the CMA said that innovation and potential competition are important and can form the basis of a conclusion that a merger will cause a “substantial lessening” of competition. The Tribunal agreed. It concluded that “dynamic competition"—the potential of a company to enter the market with an innovation that shakes up competition—"can be sufficient to justify a finding of substantial lessening of competition.”

I Know It When I See It

The Tribunal grappled briefly with what it means to measure and protect dynamic competition. First, it pointed out that the traditional tools of market analysis (concentration, market share, market definition, etc.) “are less likely to be determinative” when dynamic competition is at issue than when static (present) or potential (nascent) competition are alleged. If two companies compete now (static competition, in the Tribunal’s parlance), the CMA can measure the immediate effects of a merger. However, if one company is developing a competing product (potential competition), the CMA can reasonably gauge the market impact.

Dynamic competition is a harder case to measure—or to make, the Tribunal said. In hindsight, “one knows it when one sees it,” the Tribunal said, “but that is of scant comfort to the competition authority who must consider the issue in advance. . .and be able to justify the conclusion it reaches on judicial review.”

The Tribunal used the example of how digital cameras in cell phones invaded and overtook the market for Kodak’s “point and shoot” camera—a completely different product. Simply saying that a camera and a communications device are different products doesn’t capture what happened in that market, the Tribunal noted. In circumstances where the CMA can make a case for that kind of dynamic transformation, that analysis can legitimately serve to underpin merger enforcement.

In short, the Tribunal said that the fact that Giphy wasn’t yet selling its version of advertising in the UK doesn’t doom the CMA’s conclusion that Giphy could be a threat to Meta’s market dominance in digital ad sales.

Redaction Rethink

The decision may go back to the CMA for a redo, however, on a due process violation. Because the CMA’s investigation, first reflected in its provisional findings, was “likely to be adverse” to Meta’s interests, the agency had a duty to consult with Meta—which it did—before making its final decision. During that consultation, the CMA was obliged to give Meta the reasons for the proposed decision and the CMA’s support for it.

When CMA consulted with Meta, however, portions of the provisional findings were redacted, because the findings relied on market and competitive information of third parties that the CMA needed to keep confidential. The Tribunal held that because every party has a right know the full case against them, the CMA needed to carefully balance the degree of sensitivity of the information at issue (that is, the amount of harm likely to come to the information’s owner from disclosure to Meta) against the necessity of making the disclosure. The Tribunal reasoned that the CMA appeared to have been more concerned about protecting third parties than it was about fully apprising Meta of the basis for the CMA’s decision.

What’s Next?

The Tribunal didn’t specify what the next step is, inviting the parties to consider how and when “the question of remittal can be determined.” Of the six grounds for appeal that Meta raised, the due process concern around redaction is the only fault the Tribunal found with the CMA’s case against Meta. Depending on the redactions CMA made, whether they can be disclosed, and how they impact the decision, the case could return to almost any stage of the process on remittal. However, even if the CMA must entirely redo the case, it seems unlikely it would rethink the outcome.

The most interesting fallout will likely be around cases the CMA feels empowered to make. Essentially, the Tribunal recognized that markets (especially digital ones) don’t always develop in a linear fashion and that the CMA may have to project around corners to protect innovation and competition. But if predicting “dynamic competition” sounds to merging parties like nailing jello to a wall, it’s not an inaccurate assessment. At a minimum, uncertainty for digital merging parties just went up around any UK investigation.

Also of interest is the Tribunal’s requirement of a firmer analysis around redaction. In essence, the Tribunal is requiring an analysis very familiar to US litigants who have sought to keep confidential information that they used in court: Important rights on one hand must be balanced against the potential harm from disclosure on the other hand. The CMA will have to thoroughly document its decisions regarding that trade-off, and its procedures around securing third-party information may have to change.

But at heart, the decision affirms the CMA’s reach in this case and its decision to require Meta to divest Giphy. Two years ago, when making this deal, Meta probably never considered that risk.

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