Thresholds for Fascia Reduction and Substantial Lessening of Competition: Celesio AG v. Office of Fair Trading

Introduction

In the landmark case of Celesio AG v. Office of Fair Trading (OFT) ([2006] CAT 9), Celesio AG, a major pharmaceutical distributor and retailer, sought judicial review of the OFT's decision regarding the proposed acquisition of Alliance UniChem Plc ("UniChem") by Boots Group PLC ("Boots"). The crux of Celesio's challenge rested on the OFT's refusal to refer the merger to the Competition Commission (CC) under section 33(1) of the Enterprise Act 2002, contending that the OFT's analysis of local competition using the "fascia test" was flawed. This commentary delves into the Tribunal's comprehensive analysis and the implications of its decision on future competition law assessments.

Summary of the Judgment

The Competition Appeal Tribunal (CAT) dismissed Celesio's application, upholding the OFT's decision to approve the merger between Boots and UniChem. The OFT had employed a "fascia test" to assess local competition, focusing on reductions in the number of competing pharmacies within a one-mile radius. Specifically, the OFT identified areas where the merger would reduce the number of fascias (independent competitors) from two to one and from three to two. The OFT deemed reductions from two to one fascias as likely to result in a substantial lessening of competition (SLC), necessitating intervention. However, reductions from three to two fascias were not deemed to cause SLC based on the evidence presented. Consequently, the OFT opted not to refer the merger to the CC, provided that adequate undertakings were implemented to mitigate potential competition concerns. The Tribunal found no grounds to overturn this decision, affirming the OFT's methodological approach and conclusions.

Analysis

Precedents Cited

The judgment extensively referenced key precedents that shaped the analytical framework of the OFT:

IBAH Health: This case delineated the scope of the OFT's discretion under section 33(1) of the Enterprise Act 2002, emphasizing the "may be the case" standard for determining SLC.
UniChem v. OFT: A prior case where the principles of the fascia test were applied, reinforcing the methodology for assessing local competition impacts in mergers.
Somerfield plc v. Competition Commission: This case highlighted the standards for judicial review of competition authority decisions, particularly concerning the adequacy of reasoning in the original decision.

Legal Reasoning

The Tribunal's legal reasoning centered on the OFT's application of the fascia test and the iterative approach to analyzing competition effects:

Fascia Test Application: The OFT employed the fascia test to define the geographic market, categorizing areas based on the number of competing pharmacy chains within a one-mile radius. This method aimed to quantify the reduction in consumer choice post-merger.
Iterative Approach: Starting with the most concentrated areas (2:1 fascias), the OFT assessed the likelihood of SLC. Upon determining significant concerns in these areas, the analysis proceeded to less concentrated areas (3:2 fascias), concluding that further reductions did not pose substantial competition threats.
Regulatory Influence: The highly regulated nature of the pharmacy sector, including controlled entry and mandatory service standards, was pivotal in mitigating potential competitive harms. This regulatory backdrop limited the scope for both price and non-price competition, thereby informing the OFT's confidence in the sufficiency of remaining competitors.

Impact

The Tribunal's decision has far-reaching implications for future merger assessments within regulated sectors:

Methodological Endorsement: Affirming the OFT's use of the fascia test establishes a clear methodological precedent for defining geographic markets in similar industries.
Thresholds for Intervention: The clear delineation of fascia reduction thresholds (2:1 as problematic, 3:2 as non-problematic) provides concrete guidelines for competition authorities, enhancing predictability in merger evaluations.
Integration of Regulatory Factors: Highlighting the role of sector-specific regulations in competition assessments underscores the necessity of a nuanced approach that accounts for external regulatory influences.

Complex Concepts Simplified

Fascia Test

The fascia test is a method used to measure the concentration of competitors within a specific geographic area. In this context, a "fascia" refers to a grouping of outlets owned by the same company. By assessing the number of fascias within a one-mile radius, competition authorities can determine the level of consumer choice available and identify potential competitive imbalances resulting from mergers.

Substantial Lessening of Competition (SLC)

SLC is a crucial concept in competition law, indicating a significant decrease in market competition that can harm consumers. It may manifest through higher prices, reduced quality of goods or services, or diminished innovation. Determining SLC involves evaluating whether the merger or acquisition would create monopolistic conditions or reduce the effectiveness of competition within the market.

Conclusion

The Tribunal's judgment in Celesio AG v. Office of Fair Trading reinforces the robustness of the fascia test as a tool for defining competitive landscapes in merger assessments. By upholding the OFT's methodological approach and its judicious application of fascia reduction thresholds, the decision provides clear guidance for future examinations of mergers within regulated sectors. Additionally, the affirmation underscores the importance of considering sector-specific regulations in competition analyses, ensuring that assessments are both comprehensive and contextually informed. As a result, this judgment serves as a foundational reference point for competition authorities, promoting consistency, transparency, and fairness in the evaluation of market consolidations.