UK fine issued for breach of CMA initial enforcement order

Out-Law News | 26 Sep 2019 | 8:34 am | 3 min. read

A payments provider that breached an order to stop the integration of its UK business with a rival until a full merger investigation could be carried out has been fined £250,000 by the Competition and Markets Authority (CMA).

PayPal was served with a penalty notice for a breach of an initial enforcement order (IEO) issued by the CMA last year in respect of activities carried out in relation to its merger with Swedish mobile payments start-up iZettle.

PayPal announced the acquisition of iZettle for $2.2 billion on 17 May 2018. While the merger plans were notified to Sweden's competition authority for clearance of the deal prior to its completion on 20 September 2018, PayPal did not seek clearance from the CMA for the UK aspects of the merger. In the UK, merger filings are voluntary.

The CMA, though, had contacted PayPal concerning the anticipated merger in July 2018 and in November last year it said it would open an in-depth investigation into the merger, unless undertakings were provided by PayPal, after raising concerns about the potential impact on competition in UK markets.

No undertakings were provided, so the CMA formally opened a more detailed 'phase two' investigation in early December 2018. The investigation concluded earlier this year with the CMA determining that the merger "has not resulted, and is not expected to result, in a substantial lessening of competition in the UK".

However, the regulator found that PayPal had breached an IEO it was served with a day prior to its completion of the iZettle deal, on 19 September 2018.

The IEO required, among other things, that the company maintain and operate its business and that of iZettle separately and refrain from taking any action which might impair their ability to compete independently; to take certain steps to procure their continued separate operation; ensure compliance with the IEO; keep the CMA informed of any material developments relating to the two businesses; and to notify the CMA immediately of any suspected breach of the IEO.

The CMA granted PayPal derogations from the IEO to allow the companies to move ahead with the integration of its operations with iZettle's business in other countries, including the ability to conduct cross-selling pilot campaigns involving its non-UK businesses.

However, the CMA said the cross-selling campaign resulted in PayPal contacting UK potential customers and that this "risked impairing the ability of iZettle and PayPal to compete independently", and ran contrary to the requirements of the IEO.

The CMA said it further "risked undermining the separate sales or brand identities of PayPal, PayPal Here and iZettle, contrary to … the IEO", and that by directing potential UK customers to the iZettle offering, PayPal "was not operating the customer lists of the two businesses in the UK separately", as it was bound to do by the IEO.

"The impact of the breach was that, at the very least, UK potential customers could have perceived that the two businesses were integrated and were not being maintained separately," the CMA said. "This carried the risk of weakening PayPal Here and its brand in the UK by implying that PayPal Here was being replaced with iZettle. This in turn risked removing a source of potential customers for PayPal Here in the UK and providing iZettle with an additional source of potential customers that it would not have otherwise had access to, had it been operating independently of PayPal."

The CMA said the action might have prejudiced its merger investigation or impeded it from taking any action based on the outcome of that investigation, and that PayPal had no "reasonable excuse" for its failure to meet the requirements of the IEO.

Competition law expert Alan Davis of Pinsent Masons, the law firm behind Out-Law, said: "This is the fifth transaction where the CMA has imposed a penalty for a breach of merger review ‘interim measures’ orders, and it represents the highest fine to date for a single violation of an IEO."

"In its guidance published in June 2019, the CMA signalled that going forward it will seek to impose higher penalties for such breaches, closer to the 5% global company turnover cap. This latest penalty is consistent with the CMA’s increasingly robust approach. It also highlights potential risks faced by merger parties in global transactions, where the CMA grants ‘derogations’ to permit integration of the parties’ businesses outside the UK, but integration steps taken abroad might inadvertently impact competition between the parties’ UK businesses despite assurances given to the CMA to the contrary," Davis said.

"These risks may be amplified in digital platform/fintech businesses which frequently provide cross-border services. The CMA’s penalty notice makes clear that it has high expectations of the level of compliance effort required to ensure that an IEO is not breached and that the CMA will not be sympathetic to inadvertent breaches," he said.