In a judgment issued in a simplified form on June 4, 2020,[1] the Council of State quashed the TAR Lazio judgment that had overturned the ICA decision of May 20, 2019, concerning the acquisition of sole control of R2 S.r.l. (“R2”) by Sky Italia S.r.l. (“Sky”).[2] The judgment  was given on the merits of the case although  it was adopted within the interim phase of the proceedings, pursuant to Article 60 of the Italian Administrative Proceedings Code. The parties were not previously informed of the Council of State’s decision to provide its final judgment in  this phase, based on a temporary rule introduced during the Covid-19 emergency that enables the court to omit any advanced notice of this decision.

Background

The Decision

Sky is a provider of pay-TV services, offered both via satellite and via digital terrestrial television (“DTT”). Mediaset Premium (“MP”) produces content, which is generally transmitted by pay-TV operators. MP wholly owns R2, a company providing technical and administrative platform services for broadcasting through DTT.

In November 2018, Sky notified the ICA of its acquisition of sole control over R2. As Italian law does not provide for the automatic suspension of a concentration pending antitrust review, the parties completed the transaction before the ICA’s clearance. In February 2019, the ICA opened an in-depth investigation and one month later issued a statement of objections alleging that the transaction was capable of lessening competition in the market for retail pay-TV services. As a result, the parties withdrew the notification and tried to restore the previous competitive conditions: R2 was partially demerged from Sky and returned under MP’s control, apart from some ‘ancillary activities’ (i.e., two going concerns of R2 that Mediaset transferred back to Sky following the restitution of R2) and other residual assets.

However, the ICA took the view that the demerger did not fully restore the situation existing before the transaction. Accordingly, in its decision, the ICA authorized the concentration between Sky and R2, but imposed on Sky a set of behavioral remedies lasting for three years, which were aimed at effectively restoring competition in the market. These remedies included the obligations to: (i) grant third parties access on a fair, reasonable, non-discriminatory and cost-oriented basis to any new proprietary DTT platform that Sky might set up; and (ii) abstain from using the information and the assets acquired from R2 in connection with Sky’s pay-TV offers.

In its decision, the ICA adopted a broad definition of ‘concentration’ subject to its scrutiny: its assessment was not limited to Sky’s acquisition of R2, but also covered a set of agreements signed in 2018 between Sky and MP, by which MP assigned to Sky some DTT transmission capacity for its pay-TV services (the “DTT sub-license”), and granted a license allowing Sky to include MP’s channels and TV shows in its pay-TV offers via satellite, DTT and online. According to the ICA, these contractual arrangements would continue to be effective even after the abandonment of the notified transaction, and had already had the effect of causing MP’s exit from the market and a significant increase in Sky’s customer base.

The TAR Lazio judgment

The TAR Lazio annulled the ICA decision on both procedural and substantive grounds.

Regarding the procedural grounds, the TAR Lazio upheld Sky’s argument that the ICA had violated its rights of defense by issuing a decision based on facts and documents gathered after the closing of the investigation phase, and with regard to which Sky could not exercise its rights of defense. In particular, the TAR Lazio found that there was a substantial difference between the transaction on which the statement of objections was based and the one assessed in the decision. According to the Court, the statement of objections’ brief assessment of the potential, residual effects in case the acquisition of R2 was undone did not change this conclusion. Moreover, the ICA was not under time constraints, and should have opened of its own motion a new procedure to notify Sky of the new objections on which the decision was based.

Regarding Sky’s substantive grounds of appeal, the TAR Lazio accepted Sky’s argument that – after R2 was given back to Mediaset – there was no longer a concentration between Sky and Mediaset that could be subject to the ICA’s authorization. According to the Court, the DTT sub-license did not grant Sky any exclusivity, considering that Mediaset continued its Infinity offer.[3] Moreover, the DTT sub-license’s term was too short to result in a lasting change in control of the undertakings concerned and in the structure of the market. Also, the ICA did not show that the ‘ancillary activities’ were an undertaking to which a turnover could be attributed and failed to verify the turnover that could be attributed to the other residual assets mentioned in the ICA decision. Finally, the TAR Lazio held that the ICA did not demonstrate that the individual agreements allegedly forming part of the overall transaction were conditionally linked to each other, and that each of them had a concentrative nature.

The Council of State’s judgment

Procedural grounds

Unlike the TAR Lazio, the Council of State examined very briefly the procedural grounds of appeal submitted by Sky.

In particular, the Council of State held that the ICA decision was compliant with Article 18(3) of Law No. 287 of October 10, 1990, according to which, if the concentration has already been implemented before the decision, the ICA can impose the measures that are necessary to restore effective competition, by eliminating the distortive effects that the transaction has had on the market. In this case, the ICA had expressly stated in the decision that the commitments were imposed on the basis of this provision.

According to the Council of State, as the relevant rule clearly states that the ICA can impose commitments under certain conditions, when Sky received the statement of objections, it was in the position to know that the ICA  could impose the necessary measures to restore effective competition in its final decision, if the relevant conditions were met. Accordingly, in the Council of State’s view, there was no violation of Sky’s rights of defense.

Substantive grounds

The judgment of the Council of State focuses on the substantive issues. The supreme administrative court rejected the TAR Lazio’s findings under different respects.

First, the Council of State held that the TAR Lazio erred in finding that: (i) the DTT sub-license did not grant Sky any exclusivity because Mediaset could continue its Infinity offer; and (ii) the duration of that sub-license was too short to result in a lasting change in the companies’ control and in the structure of the market. Regarding the first point, the Council of State held that the Infinity offer’s market share was too low (below 1% according to the ICA decision) to compensate for the effects of the concentration. Regarding the second point, the Council of State held that, even when a competitive force is driven out of the market for a short period, irreversible effects on competition in the market can arise.

Second, according to the Council of State, the TAR Lazio erred in finding a lack of evidence that the ‘ancillary activities’ were undertakings to which a turnover could be attributed in accordance with the European Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (2008/C 95/01 – “Commission Notice”). In the Council of State’s view, the ICA correctly held that the ‘ancillary activities’ were an undertaking to which a turnover could be attributed, because they were complementary to the activity of the undertaking concerned.

Third, the Council of State disagreed with the finding of the TAR Lazio that the ICA failed to verify the turnover attributable to the other residual assets mentioned in the ICA decision. Indeed, according to the Council of State, a number of sections of the ICA decision show that the ICA considered the turnover of all the interested parties.

Fourth, according to the Council of State, the TAR Lazio erred in finding a lack of evidence that the individual agreements allegedly forming part of the overall transaction were conditionally linked to each other, and that each of them had a concentrative nature. According to the Council of State, the ICA assessment was in line with the Commission Notice, according to which similar and interdependent transactions that take place between the same parties in a short period of time must be considered as a single concentration for the purposes of applying merger control rules.

Finally, the Council of State agreed with the ICA’s finding that, even though the parties had withdrawn the notification of the transaction, they had failed to show the re-establishment of the previous status quo. The court reasoned that the grant of the DTT sub-license and the acquisition of control over R2 (even though for a limited period of time) had irreversibly altered the competitive dynamics in the affected market, also in light of fact that the acquisition of control over R2 allowed Sky to request a technological change to R2 smart card reader settings to remove the so-called “pairing”, which prevented them from being used with smart cards other than R2’s. The Council of State concluded that this allowed Sky to strengthen its dominant position in the market for pay-TV services.

[1]              Council of State, judgment No. 3534/2020.

[2]              TAR Lazio, judgment No. 2932/2020; ICA decision of May 20, 2019, No. 27784, C12207, Sky Italia/R2.

[3]              The Infinity offer is provided by MP on its over-the-top platform and is a natural continuation of MP’s offer, given that it includes the same content. It was found to compete with Sky’s offer on the market for retail pay-TV services.