On 7 April 2020, US District Judge Stark decided not to prohibit the proposed acquisition by Sabre (one of the leading global distribution systems (GDSs), ie a two-sided platform connecting airlines and travel agents) of Farelogix (a technology specialist which provides distribution solutions to airlines) for $360m.
However, celebrations were short-lived for the parties, as just two days later the transaction was blocked by the UK's Competition and Markets Authority (CMA) following a prolonged Phase 2 review.
Although this resulted in the abandonment of the transaction, varying forms of appeal on both sides of the Atlantic have ensured that the saga rolls on. Sabre has applied to the UK's Competition Appeal Tribunal (CAT) for the decision to be reviewed. In addition, the US Department of Justice (DOJ) has requested that the US Court of Appeals vacate the US judgment, given that the deal is dead. This has been hotly rejected by the parties, who claim that the Court of Appeals should not reward the DOJ 'for its gamesmanship by vacating the loss the DOJ earned by bringing this meritless litigation'.
Branded a 'killer acquisition' by both the CMA and the DOJ, the CMA's prohibition decision raises broader questions on:
- the extent of the divergence between the CMA approach and that of the US in this 'two-sided market case'; and
- whether this example of interventionism by the CMA will withstand scrutiny on appeal.
We conclude that there are distinct legal frameworks for assessing two-sided markets in these jurisdictions, and that more clarity on the US approach would be welcomed by those contemplating entering into similar transactions. However, the divergent outcomes in this case are more likely to have stemmed from opposing conclusions relating to findings of fact/weighing up of evidence by the US Court and the CMA when applying their respective legal frameworks.
While Sabre may be expected to rely heavily on the US Court’s judgment during the course of its appeal to the CAT, a success on the other side of the Atlantic does not alter the (recently confirmed) high degree of deference shown by the CAT to the CMA in merger decisions.
It is therefore unlikely that the CMA’s application of the legal framework for assessing two-sided markets will be the main focus of Sabre’s appeal to the CAT. Instead, the summary of Sabre’s grounds for appeal primarily focuses on whether the CMA lawfully asserted jurisdiction, thereby initiating the first review of the CMA’s application of its 'share of supply' test for establishing jurisdiction.
In light of the CMA’s increasingly interventionist approach, this will be 'one to watch' for all future mergers involving parties with a limited presence on the UK.
It takes two (sides) to tango? UK vs US legal frameworks for analysing competitive effects in two-sided markets
The CMA acknowledges that the two-sided nature of Sabre’s business model (which connects airlines to travel agents) 'differs from Farelogix’s ‘channel-agnostic’ model to supply distribution solutions to airlines and leave them to manage the travel agent relationship'. Further, the CMA's final report (PDF) recognises the need to take into account the competitive effects on both the airline and travel agent sides of the market, explicitly recognising that all parties (including both airlines and travel agents) have their own commercial interests.
While the CMA appears to primarily focus on the airline side of the two-sided platform in its provisional findings (PDF) (stating that it is 'appropriate to put more weight on evidence from airlines than from travel agents'), the CMA rowed back on this approach in the final report. This merely states that travel agents’ views are 'not more determinative than airlines’ views' (emphasis added).
However, the CMA did not agree with the parties’ argument that 'their products constitute different markets simply because Sabre’s business is two-sided and Farelogix’s is not'. Instead, the CMA considers that two-sided GDS platforms such as Sabre face pricing pressure from other channels, including both the distribution solutions provided by Farelogix (referred to by the CMA as 'GDS bypass') and airlines’ own websites.
As a result, the CMA's final report concludes that the relevant product market for assessing the proposed transaction is the supply of distribution solutions to airlines. This market includes:
- the (two-sided) platform services provided to connect airlines to travel agents by GDS (such as Sabre);
- distribution solutions which connect airlines directly to travel partners (such as those provided by Farelogix); and
- direct channel (primarily airlines’ own websites).
In contrast to the CMA’s approach, the US Court (PDF) found that a one-sided player cannot compete in a two-sided market: 'As a matter of antitrust law, Sabre, a two-sided transaction platform, only competes with other two-sided platforms, but Farelogix only operates on the airline side of Sabre’s platform'. Therefore, the merger would not substantially lessen competition because Sabre and Farelogix do not compete as a matter of law.
This holding was based on US precedents holding that Sabre operates a two-sided transaction platform (US Airways v. Sabre) and that two-sided transaction platforms compete only with other two-sided transaction platforms (the Supreme Court’s (controversial) judgement in Ohio v. American Express). As there was no dispute that Farelogix was not a two-sided transaction platform, the court felt 'compelled to follow' these precedents and hold that Sabre and Farelogix did not compete, despite also finding that 'a preponderance of the evidence shows that Sabre and Farelogix do view each other as competitors' and 'as a matter of real-world economic reality that Sabre and Farelogix do compete to a certain extent'.
The strict application of Ohio v. American Express is the key reason for the DOJ’s application to vacate the transaction made to the US Court of Appeals. The DOJ claims that this decision would have 'an outsized effect on digital markets', as a two-sided player could (in theory) acquire any one-sided competitor.
Dancing to a different tune: beyond a legal technicality
As mentioned above, the US Court found that Sabre does not compete with Farelogix as a matter of law.
However, the US Court also considered (on a secondary basis), that even if it had treated Farelogix as a competitor in a two-sided transaction market, the DOJ still would have failed to prove its case. It found that the DOJ failed 'to produce evidence that the anticompetitive impact of the merger on the airline side of the GDS platform would be so substantial that it would… make the two-sided GDS platform market, overall, less competitive'.
This is arguably close to the UK approach of taking the competitive effects of both sides of the market into account. In particular, the US Court (like the CMA) recognised that GDSs such as Sabre are directly and heavily constrained by both the distribution services provided by Farelogix and airlines’ own websites.
However, even when the US Court considered a similar approach to the UK legal framework for assessing two-sided markets, it nevertheless reached a different overall conclusion, ie that the proposed transaction should not be prohibited. This appears to be due to divergences in findings of fact/weighing up of evidence by the US Court and the CMA.
This is particularly striking given that both the US Court and the CMA finds that the relevant geographic market is worldwide, with the result that they both considered the same evidence in the same context. In relation to the evidence raised in the US trial, the CMA notes that it 'conducted an independent inquiry based on the evidence' provided by the parties. Nevertheless, the CMA also confirms that it has taken the parties’ submissions in the US trial into account.
The existence of barriers to entry for suppliers of new distribution capability application program interfaces (NDC APIs) is a key example of the CMA and the US Court finding overtly contradictory findings of fact.
The US Court established that there are several competitors in airline ticket distribution which indicates a lack of entry barriers. In particular, it noted that while Farelogix has 'some unique advantages', other suppliers of NDC APIs have demonstrated that 'new entrants can develop a 'good reputation and track record' despite Farelogix’s established position in the market.'
Further, the US Court found that the 'record does not establish that building an adequate 'NDC booking services solution' is particularly difficult' (noting that the technological standard for developing an NDC API product is publicly available).
In light of these findings, the US Court dismisses the biggest concern in 'killer acquisition' cases, ie as outlined in the OECD's recent note, that the acquisition of a nascent firm may trigger 'the loss of not only a competitive constraint, but also a product'.
This is in stark contrast to the UK where, the CMA identified a number of barriers to entry. While the CMA also acknowledged that technological barriers in the provision of NDC APIs have been lowered as a result of the publicly available NDC standard, it found that 'difficulties remain in developing competitive capabilities, which can require significant upfront investment and requires specific expertise, and that commercial barriers to entry and expansion also represent significant obstacles for new entrants and providers seeking to expand.'
In light of the opposing conclusions reached by the CMA and US Court, Sabre may be expected to rely heavily on the US Court’s findings of fact/weighing of the evidence during the course of its appeal to the CAT.
However, a success on the other side of the Atlantic does not alter the high degree of deference shown by the CAT to the CMA in merger decisions. In the recent case Tobii AB (publ) v. CMA, the CAT confirmed that the CMA enjoys a wide margin of discretion when assessing factual evidence, and that there 'needs to be a strong case to show that the [CMA] has manifestly drawn the line in the wrong place'. The CAT also adopted a similar approach in Ecolab/Hochem.
As a result, the CMA’s application of the legal framework for assessing two-sided markets is unlikely to be the main focus of Sabre’s appeal to the CAT. Instead, the CMA’s approach to jurisdiction is likely to be a key battle ground in Sabre’s appeal in front of the CAT.
Taking centre stage: CMA is stretching the limits of jurisdiction
The summary of Sabre’s grounds for appeal primarily focuses on whether the CMA lawfully asserted jurisdiction, thereby initiating the first review of the CMA’s application of its 'share of supply' test for establishing jurisdiction.
The CMA identified the supply of 'an IT solution to airlines for the purpose of airlines providing travel services information to travel agents to enable travel agents to make bookings' as the relevant description of services for the purposes of determining whether the share of supply test is met. The CMA's final report notes that the parties submitted that this description of services is 'lengthy, complex, involves a large degree of economic analysis, and has required nearly a year to crystallise'.
Further, the parties argued that even if this description of services is appropriate and reasonable, the CMA erred in determining which service providers fall in and out of its scope. First, they argued that Farelogix does not provide a service that meets this description to UK airlines. FLX generates no UK revenue, and the CMA (somewhat tenuously) based its jurisdiction based on a de minimis increment from FLX services provided to British Airways (BA) in the context of BA’s interlining agreement with American Airlines. Further, the parties challenged the exclusion of other providers, such as metasearch engines.
This interventionist approach and flexible use of the share of supply test mirrors the approach taken by the CMA in other recent cases such as Illumina/PacBio and Roche/Spark. It also serves as a reminder of the increasing difficulties facing parties in navigating a world in which an increasing number of antitrust authorities who, particularly in the case of the CMA, are looking to intervene and prove themselves on a global stage.
Further, the increasingly close alignment of antitrust authorities is likely to accelerate this trend: the parties claim that the DOJ 'appears to have prompted the CMA to investigate the proposed acquisition and coordinated its efforts with its UK counterpart.'
In light of the CMA’s increasingly interventionist approach, the CAT decision on this point will be 'one to watch' for all future mergers involving parties with a limited presence on the UK.
For more information on antitrust risk in strategic deals in an era of heightened global antitrust intervention, see Global antitrust in 2020 - strategic acquisitions, part of the 10th edition of our annual antitrust report of 10 key themes for the year ahead.