On October 20, 2021, the United Kingdom’s (U.K.’s) Competition and Markets Authority (CMA) imposed a penalty notice of 50.5 million pounds (about US$69.8 million) on Facebook. The penalty was imposed under section 94A of the Enterprise Act 2002 for “for failures to comply, without reasonable excuse, with the requirements imposed on Facebook by the initial enforcement order issued by the CMA.” The initial enforcement order (IEO) was issued on June 9, 2020, under section 72 of the Enterprise Act 2002 and was made as a result of Facebook’s acquisition on May 15, 2020, of GIPHY, a service that allows the sharing of GIFs.
The U.K. operates a voluntary merger control regime, whereby companies are not required to seek approval from the CMA prior to completing an acquisition but, instead, must make a self-assessment whether to complete a merger without seeking clearance. In cases where a merger proceeds and the CMA believes that consumers may be affected, it may stop companies from integrating further until it conducts and completes an investigation to ensure the merger does not have an impact on competition in the market. The CMA’s interim measures guidance states as follows:
… [T]he purpose of merger control is to regulate in advance the impact of mergers on the competitive structure of markets. If the CMA decides that a merger does require scrutiny, it is essential to the functioning of the UK’s voluntary, non-suspensory merger regime that Interim Measures to preserve the pre-merger competitive structure of markets should be effective. The CMA’s ability to impose Interim Measures on merging parties, and to impose penalties where these have not been complied with, are the necessary corollary of having a voluntary regime. (citations omitted)
In the case of Facebook’s acquisition of GIPHY, the CMA determined that consumers may be affected and, accordingly, imposed an IEO on Facebook in June 2020 and started an investigation into the completed acquisition. The IEO may require companies to unwind preemptive action (i.e., to reverse integration and restore the parties to the positions in which they would have been had the integration not taken place) and prevent companies from integrating further while a merger investigation is completed. The IEO requires companies to continue to compete with each other as if the merger had not occurred “to ensure that the viability and competitive capability of each of the merging parties is not undermined pending the outcome of the CMA’s investigation, as this would risk prejudicing the ability of the CMA to achieve an effective remedy if it were to find that the merger gives rise to a substantial lessening of competition.”
As part of the IEO, Facebook was required to provide the CMA with regular updates that outlined the steps it had taken to comply with the IEO. The CMA considers that “compliance reports are crucial to ensure that the CMA has oversight of the companies’ behaviour, including whether Facebook has been taking any action which might prejudice the outcome of its investigation.” In the first case of its kind, the CMA found that Facebook had breached an IEO by significantly and repeatedly failing to report all the information required by the IEO, even in the face of warnings from the CMA.
During the investigation, Facebook requested that the IEO be partially lifted (known as a “derogation”), which would enable it to engage in activity that was otherwise banned under the IEO. The CMA did not grant the derogation, stating that it did not have sufficient information from Facebook to reach a decision. Facebook then appealed the CMA’s decision to the Competition Appeal Tribunal, which, on November 13, 2020, dismissed all grounds of Facebook’s appeal, noting in its decision that Facebook was taking a “high risk strategy” by not complying with IEO requirements. Facebook appealed this decision to the Court of Appeal, which upheld the Competition Appeal Tribunal’s decision, finding that the CMA had acted appropriately and stating that the “central problem in this case was entirely of Facebook’s own making” due to its refusal to cooperate with the CMA.
When determining whether to impose an administrative penalty, the CMA must consider all the circumstances of the case, along with a number of factors, including where
- the failure to comply is likely to have an adverse impact on the CMA’s investigation, in particular the ability to obtain evidence relevant to the determination of issues being investigated and the ability to meet statutory or administrative timetables
- the failure to comply is significant and/or flagrant (whether committed intentionally or negligently)
- P [individuals and corporate and unincorporated bodies that fail to comply with any investigatory requirements or interim measures in mergers cases] has previously failed to comply with an information request or CMA decision, whether in the current investigation or previously (that is, there is an element of ‘recidivism’)
- the imposition of a penalty is required to encourage (swift) compliance by P, and
- P sought to obtain an advantage or derive benefit from the failure.
In the current instance, the CMA found that Facebook’s failure to comply with the IEO was deliberate and issued the substantial fine for “this major breach, which fundamentally undermined its ability to prevent, monitor and put right any issues.”
In the investigation, the CMA determined that the merger between Facebook and GIPHY “may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom” and referred Facebook for an in-depth investigation. The provisional findings of the CMA, published on August 12, 2021, likewise expressed concerns about the merger’s adverse impact on competition, but the investigation is ongoing.