Merger Control 2022

Last Updated July 05, 2022

Mexico

Trends and Developments


Authors



Galicia Abogados, S.C. has more than 27 years of experience and a legal team of 175 lawyers, including 34 partners and five counsels. The business and administrative teams bring the total headcount to around 230 employees, working across 25 practice areas at offices in Mexico City and Monterrey. The firm is renowned for its impeccable reputation and knowledge in strategic sectors: financial, energy and infrastructure, private equity, regulated industries, real estate, hospitality and life sciences. The distinguishing feature that marks Galicia out as a leading firm in the Mexican legal market is its ability to provide a unique legal service offering strong transactional and regulatory advice coupled with strategic capabilities in litigation and environmental, social and governance matters.

The Fight for the Digital Economy: Jurisdiction Conflicts Between the Antitrust Authorities in Mexico

Introductory note

A new Federal Competition Act (FCA) was enacted in Mexico on 23 May 2014. The FCA vested the newly formed Federal Economic Competition Commission (COFECE or “the Commission”) with strong enforcement and regulatory powers.

Interestingly, COFECE has had to share these powers for the first time since its predecessor, the Federal Competition Commission, was formed in 1992. Its recently formed rival, the Federal Telecommunications Institute (IFT or “the Institute”), is a regulator and antitrust enforcer in the telecommunications and broadcasting industries.

There were hardly any jurisdictional conflicts between the two agencies in the first few years following the enactment of the FCA. However, the development of new technologies and the growth of over-the-top (OTT) platforms has led the Commission and the Institute to come face to face. Both seek to be recognised as the competent authority to perform merger review processes and investigate potential anti-competitive conduct in these fascinating emerging markets.

COFECE and IFT have increasingly been at odds, as they have both asserted jurisdiction in these areas during the past eight years. The merger review process faced by applicants in Mexico has become longer and less predictable as the battle intensified in recent years.

This article considers the agencies’ jurisdictional decisions, as well as those of the federal courts when jurisdictional disputes were submitted for their review. It also provides a chronological overview of the precedents that have resulted from the stand-off between these two authorities and some key takeaways for those engaged in the aforementioned markets.

Applicable regulation

The Commission was the only antitrust enforcer across all markets and industries when Mexico’s first competition law was enacted in 1992. This remained true for almost 20 years until the Mexican constitution was overhauled to introduce major telecommunications and antitrust changes.

One of the main features of 2013’s so-called telecommunications reform was the creation of a robust telecommunications and broadcasting regulator (IFT). The telecommunications industry was seen as a highly litigious sector, constituting a considerable portion of COFECE’s antitrust work, so the Institute was also empowered as an antitrust enforcer in said area.

For the first time two agencies had jurisdiction on antitrust matters and, as such, there was potential for jurisdictional conflict between them. The FCA of 2014 outlined the following procedure to adjudicate any such conflict.

  • As soon as one of the agencies believes the other is hearing a matter that falls within its jurisdiction, it shall request the other agency to turn over the respective file.
  • If the requested agency agrees that the requesting agency is competent, it shall turn the matter over within five days of receiving the request.
  • Conversely, if the requested agency believes that it – rather than the requesting agency – has jurisdiction, it shall inform the requesting agency within the same timeframe. The requested agency shall suspend proceedings and refer the matter to a federal circuit court specialising in competition, telecommunications and broadcasting. This court will then determine which agency has jurisdiction.
  • The relevant merger review process or investigation will remain suspended until the federal court makes a decision and adjudicates jurisdiction in favour of an agency.

The whole process takes from three to seven months to go through in practice. It is worth noting that there is not time to dispute jurisdiction, as the process only begins when the disputing agency learns that the other agency is hearing a case that may fall within its jurisdiction.

The first circuit court specialising in competition, telecommunications and broadcasting ruled that, in the absence of a term in the law to dispute jurisdiction over a case under review by the other agency, it is not appropriate to make any further decision on the matter (see Conflict 2, CCA 1/2021, p24).

Early cases

Public records reveal the first case filed before both authorities was a merger control application following the acquisition of Metro Net by SixSigma Networks Mexico.

The parties involved in the transaction filed applications with both agencies, separating markets into the jurisdiction of each authority. The Institute reviewed and cleared managed services, hosting and cloud computing markets, whereas the Commission reviewed and cleared the IT consulting and outsourcing services. Neither authority challenged the competition of the other.

Nokia–Alcatel (Case No CCA 2/2015)

One year later, however, the second circuit court specialising in competition, telecommunications and broadcasting decided in Case No CCA 2/2015 (Nokia–Alcatel) that jurisdiction over a case should not be divided and the competent authority must study all markets involved in said transaction.

The court concluded, in summary, that:

  • the analysis of economic competition matters must not be carried out in a segmented manner; and
  • the Institute was the competent agency to hear the case and decide across all markets affected by the transaction, pursuant to the principle of specialisation.

The court was keen to state that its decision was based on the particular facts of the case and noted that in the absence of any compelling evidence submitted by the Commission, as disputing agency, it deferred to the Institute on the principle of specialisation. The court also made clear that its decision should not be understood as a general principle applicable to all future transactions.

Merger in the audiovisual content for entertainment industry (Case No CCA 1/2017)

The same second circuit court acted on this conclusion in Case No CCA 1/2017 two years later. The conflict arose when the Institute argued that it was competent to review the entire concentration and that a segmentation of jurisdiction was not possible (based on the Nokia–Alcatel precedent).

The court concluded that the Institute was not competent to review and analyse the effects of the transaction in all markets and consequently affirmed the Commission’s jurisdiction to review the effects of the transaction in certain markets. Mexico’s two competition authorities reviewed and cleared the same transaction as a result of this decision, but each focused on different markets.

The court also noted that the determination of the relevant markets and related markets, as well as the actual effects that the transaction could have on other competitors and consumers of the relevant goods or services, should be taken into account when considering the special characteristics of each market.

The agencies’ different specialties led the court to conclude that not all audiovisual content falls within the jurisdiction of the Institute, which is limited to content delivered through broadcasted channels or paid audio and video platforms.

The court similarly noted that the products or services sold or rendered in a particular market using telecommunications or broadcasting as input (or, conversely, being used as input in such industries) would not in itself be sufficient to guarantee the Institute jurisdiction.

Recent cases

The debate between the Institute and the Commission has escalated in the past few years and become more complex. This is, to a certain extent, because early court decisions were more general in nature and did not shed a lot of light on the actual markets in which each authority is competent. But it is, to an even greater extent, down to the additional questions the rapid technological evolution of OTT platform services has brought to the discussion.

It is important to mention that, pursuant to applicable regulation, telecommunications carriers and broadcasters require a licence from IFT, whereas firms that provide services through OTT platforms do not require any such licence or authorisation.

Federal courts have issued three recent decisions addressing jurisdiction over OTT markets. The courts’ criteria have changed in such decisions, somehow swinging between the two agencies.

The first decisions (Case Nos CCA 4/2019 and CCA 1/2021) favoured COFECE and largely held that jurisdiction over the services provided through OTT platforms is vested in the Commission. However, the court concluded in its most recent decision (Case No 3/2022) that IFT had jurisdiction if the disputed markets featured services that required the internet and also somehow fell under the asymmetric regulation imposed on the preponderant economic agents.

IFT had a constitutional mandate to set forth asymmetric regulation for entities in the broadcasting and telecommunications sectors with a national participation greater than 50%. The areas in which regulation was imposed were:

  • interconnection, access and shared use of passive infrastructure;
  • user and competition protection;
  • accounting separation;
  • fixed services;
  • mobile services;
  • content; and
  • unbundling of the local loop.

The following three subsections briefly summarise the holdings of each case.

Uber–Cornershop merger application (Case No CCA 4/2019)

Uber communicated its intention in October 2019 to acquire a majority stake in Cornershop, subject to regulatory approvals in Mexico. The main services rendered by Uber in Mexico at that time were mobile applications for:

  • connecting users with drivers;
  • an on-demand food distribution platform;
  • electric bicycles and scooters; and
  • freight transportation services.

Cornershop's business consisted of an on-demand delivery platform that allowed users to order and purchase groceries and goods from local supermarkets and retail stores.

The conflict arose when Uber–Cornershop filed the merger application with COFECE, which prompted IFT to dispute jurisdiction. The matter was subsequently submitted to the first circuit court, as both agencies claimed jurisdiction.

The court held that the Commission was competent to review the complete transaction because “the services provided through digital platforms such as Uber and Cornershop do not pertain to the telecommunications sector”.

The court decided this was because Uber and Cornershop “are a space or marketplace, such as a call centre or shopping mall, through which transactions of various economic activities are carried out”. Thus, it concluded, “the underlying economic activity remains the same, regardless of the channel used to market the good or service in question”.

IFT claimed that it had jurisdiction over the services provided for the following reasons, which were dismissed by the court.

  • The services constitute novel modalities of electronic communications, which are part of the telecommunications sector.
  • Digital platforms have technical and functional characteristics of electronic communications that make them a part of the internet ecosystem and therefore part of the larger telecommunications sector.

The court believed these statements fail to demonstrate that the economic consequences of a possible concentration between such digital platforms do not fall within the competence of the Commission, mainly owing to the economic effects that could impact the markets after the concentration.

Finally, after seven months with the circuit court, the merger review process continued before the Commission. The transaction was approved within an additional period of nine months.

Investigation into online search services, social networks, mobile operating systems, cloud computing services and related services (Case No CCA 1/2021)

IFT launched an investigation during the last quarter of 2020 into the markets of online search services, social networks, mobile operating systems, cloud computing services and related services. Its purpose was to establish whether there are any potential barriers to competition and/or essential facilities that could generate anti-competitive effects.

COFECE challenged the IFT’s jurisdiction to investigate the aforementioned markets as soon as the Commission became aware that such an investigation had been launched. This was the first time that a jurisdictional conflict concerning an investigation (rather than a merger control process) had been submitted to a circuit court.

The first circuit court could not establish whether online search services, social networks and cloud computing services had any kind of relationship, impact or incidence in the telecommunications and broadcasting sectors, at least in terms of competition. The court cited the following reasons for arriving at this conclusion.

  • The investigated services do not per se require the use of spectrum or telecommunications networks, as these markets are clearly differentiated from the broadcasting and telecommunications sectors.
  • The main players in online search services, social networks and cloud computing services do not participate in the broadcasting and telecommunications sectors and can provide their services without any concession or authorisation from the Institute.
  • Although the investigated services are rendered through the internet, the latter is used only as an input. However, this alone does not mean that such services necessarily affect the telecommunications and broadcasting sectors.
  • None of the preponderant economic agents in the telecommunications and broadcasting sectors participate in the markets under investigation. None of these markets are related to the asymmetric measures imposed on such agents by IFT.

Conversely, with respect to mobile operating systems, the court found that IFT is the competent antitrust enforcer because it is, “from a regulatory standpoint, empowered to issue technical guidelines regarding infrastructure and mobile terminal equipment that make use of the radioelectric spectrum or that connect to telecommunications networks”.

The court also considered mobile operating systems “closely linked to the telecommunications and broadcasting sectors as, in order for users to access such services, they require a mobile device that connects to telecommunications networks and/or to the radio spectrum to access voice, video, audio and data services”.

The court ultimately split jurisdiction between both agencies and held that the Commission may conduct antitrust investigations in the online search services, social networks and cloud computing services markets, whereas the Institute may only so do in the mobile operating systems market.

The process before the circuit court to settle the jurisdiction question in this case lasted six months. The Commission then decided not to pursue the investigation in the markets where it had jurisdiction. The Institute’s investigation into mobile operating systems, on the other hand, is still pending at the time of writing.

Merger in the OTT industry (Case No CCA 3/2022)

This case involves merger control applications filed by the parties (the names of which have not been disclosed) for a transaction before both the Commission and the Institute, noting that each authority was competent in specific and different markets.

The Institute challenged the competence of the Commission to review some markets initially proposed by the parties and thus the matter made its way to the second circuit court.

The disputed markets were:

  • production, acquisition, provision, licensing and distribution of audiovisual content for OTT platforms; and
  • sale of advertising time and space in OTT platforms for audiovisual content.

The court held, after five months of proceedings, that the Institute had exclusive jurisdiction to review the aforementioned markets, which are solely related to OTT services. This showed how heavily the court weighed the essence of OTT platforms. What sets OTT platforms apart from other content commercialisation mechanisms is their remote distribution through the internet, which in turn runs on telecommunications networks.

The court went on to note that, although the distribution of audiovisual content through internet platforms does not require a broadcasting or telecommunications services licence, the distribution of audiovisual content requires either broadcasted channels or telecommunications networks – without them, such platforms cannot deliver content to end users.

This shows that, in the court’s opinion, the autonomy of the market under analysis vis-à-vis the internet telecommunications networks is questionable because, without them, the operation of OTT platforms would be limited.

The court finally introduced a new test to allocate jurisdiction between the two agencies, stating that jurisdiction would be vested in IFT where preponderant economic agents in the telecommunications or broadcasting sectors participate in the analysed activity, or where these are activities regulated asymmetrically by the Institute.

This last decision departs from the rulings in Case Nos CCA 1/2021 and CCA 4/2019 by making internet usage the key requisite to settle the jurisdiction in favour of the Institute and hinting that IFT will likely be competent whenever preponderant agents and/or asymmetric regulation are involved.

This decision also appears to overlook the fact that traditional markets are migrating towards digital services, which require the internet as a critical input to connect suppliers, intermediaries and customers. Nowadays, the disappearance of brick-and-mortar outlets – or at least the reduction of these spaces – is commonplace, as goods or services are ordered through online stores instead.

It is of paramount importance to establish if this change in the preferred means of conducting business is enough to redetermine whether a transaction or activity pertains to the telecommunications or broadcasting sector. Depending on the opinion of the Mexican federal courts going forward, antitrust jurisdiction could gradually shift from COFECE to IFT.

An ongoing case

Another jurisdictional dispute in the OTT services space is pending before the Supreme Court at the time of writing, even though the transaction was cleared by both agencies. Grupo Televisa and Univision Holdings, Inc reached a deal to combine the content and media assets of both companies in 2021.

The parties filed for merger control clearance before the two agencies. The Institute and the Commission entered their correspondent judgments, but both considered themselves competent in the market of audiovisual content commercialised through OTT platforms.

This time, though, the Institute challenged the Commission’s decision before the Supreme Court as both agencies had already resolved the matter (ie, there was no jurisdiction to settle as the matter was no longer pending). Even so, the Institute challenged a decision that had cleared a transaction,  for the first time in the history of these conflicts.

Guidance collected from competition conflicts

Mexico’s two antitrust enforcers keep disagreeing about who gets jurisdiction over OTT services. These platforms are a critical component of the digital economy, so IFT and COFECE must strive to assert their jurisdiction and ensure they remain relevant in the future marketspace. Both agencies are devoting precious time and resources in doing so, perhaps to the detriment of other ongoing matters.

For instance, IFT thought that there was potential anti-competitive conduct in the online search services, social networks and cloud computing services. COFECE obtained jurisdiction over such markets after one of the aforementioned arguments. Ironically, it decided not to pursue such an investigation, which makes one question why IFT launched an investigation in the first place and whether COFECE had access to the evidence that motivated the Institute to so do.

Similarly, cross-border transactions have experienced significant delay in areas that are potentially subject to the jurisdiction of both agencies. Proceedings before federal courts to settle jurisdiction conflicts can last up to seven months, which in turn adds to the time the competent agency (or agencies) takes to clear the matter. This can lead to a several-month clearance process in practice.

The following guidelines, which are based on the federal courts’ more recent decisions, may help define which agency has jurisdiction over OTT-related markets.

  • If the underlying activity can exist without use of the internet, the Commission is likely the competent authority, even when OTTs or related markets are involved.
  • If the concerned services are performed by any of the preponderant economic agents, or related to the asymmetric regulation imposed on them by the Institute, IFT would be competent.
  • A question mark would be placed on such markets that do not fall under these clear segmentations. (This was the case for online search services, social networks and cloud computing services, which – in terms of the decision of the first circuit court in Case No CCA 1/2021 – fall under the jurisdiction of the Commission.)

These conflicts cause noticeable confusion among market participants, particularly those engaged in activities related to OTTs and their services, because the agencies do not seem able to resolve their differences without resorting to the courts.

It is worth remembering that the FCA regulations issued by both agencies allow consultation between them for the purpose of settling competition disputes. Considering all the difficulties involved in going to court, it would be desirable to see closer co-operation between the agencies for the sake of helping applicants avoid the high costs associated with jurisdictional proceedings before federal courts.

Galicia Abogados, S.C.

Torre Del Bosque
Blvd. Manuel Avila Camacho
No 24
7th Floor
Lomas de Chapultepec
1100 Mexico City
Mexico

+52 5555 409 200

apoyoprofesional@galicia.com.mx www.galicia.com.mx
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Trends and Development

Authors



Galicia Abogados, S.C. has more than 27 years of experience and a legal team of 175 lawyers, including 34 partners and five counsels. The business and administrative teams bring the total headcount to around 230 employees, working across 25 practice areas at offices in Mexico City and Monterrey. The firm is renowned for its impeccable reputation and knowledge in strategic sectors: financial, energy and infrastructure, private equity, regulated industries, real estate, hospitality and life sciences. The distinguishing feature that marks Galicia out as a leading firm in the Mexican legal market is its ability to provide a unique legal service offering strong transactional and regulatory advice coupled with strategic capabilities in litigation and environmental, social and governance matters.

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