Judgment (Non-confidential version)

Judgment of the Tribunal on an application by Stagecoach Group plc (“Stagecoach”) for a review under section 120(1) of the Enterprise Act 2002 (“the Act”) of a decision of the Competition Commission (“the Commission”) contained in a report entitled “Stagecoach Group plc/Preston Bus Limited Merger Inquiry” dated 11 November 2009 (“the Decision”). In the Decision, the Commission found that Stagecoach’s acquisition of Preston Bus Limited (“PBL”) led to a substantial lessening of competition (“SLC”) in the market for commercial bus services in the Preston area. The Commission concluded that only a divestiture of a reconfigured PBL business would be an effective remedy for the SLC it had found.

Stagecoach applied to the Tribunal for a review of the Decision, relying on four grounds of challenge: (i) that the Commission had misdirected itself as to the correct legal approach to apply pursuant to its duty under section 35 of the Act; (ii) that the Commission made a number of highly material findings of fact which were unsupported by the evidence; (iii) that the Commission acted in a procedurally unfair manner; and (iv) that the Commission imposed a disproportionate remedy.

On the first ground, the Tribunal concluded that the Commission had applied the correct legal test when choosing the counterfactual, namely what could have been expected to happen to PBL and Stagecoach’s bus operations in the absence of a merger between them. The Tribunal held that, in accordance with its statutory duties, the Commission considered whether the merger had led to an SLC.

In relation to the second ground, the Tribunal concluded that the Commission had not acted rationally in its choice of counterfactual and, in particular, the Decision did not clearly explain why the Commission had decided to base the counterfactual on an assumption that Stagecoach had not launched services on the Preston intra-urban routes in June 2007, thereby disregarding what actually happened in the relevant market prior to the merger. In the Tribunal’s view there was an inconsistency in this regard with the Commission’s analysis of the failing firm defence in which it did consider the actual position in the market as at September 2008. In so far as the decision to disregard Stagecoach’s pre-merger conduct was based on the Commission’s factual findings that that conduct was pursued with little regard for profit and normal commercial considerations, the Tribunal upheld Stagecoach’s submissions that there was no factual support for those findings in the evidence before the Commission. The Tribunal held that the Commission had acted irrationally in inferring from the lack of contemporaneous strategy or revenue/profit forecast documents disclosed by Stagecoach that Stagecoach’s management was not concerned about whether the new routes would be profitable. The calculation of the losses incurred by Stagecoach prior to the merger did not support inferences about what Stagecoach’s commercial considerations were in launching the routes because Stagecoach had expected that PBL would cut back its services in the intra-urban sector but PBL did not in fact do so. The evidence from third party bus operators on which the Commission relied for concluding that Stagecoach endured losses on its new routes for longer than was normal in the industry did not, when read in full and in context, support any such conclusion. In so far as the Commission’s reasoning was based on a rejection of the evidence from Stagecoach’s director that the company’s intention in June 2007 was to establish 25 new buses operating out of the Preston depot, the Commission’s reasoning was insupportable in that there was no basis on which the Commission could properly reject that evidence. Each of the findings that were unsupported by the evidence was material to the Commission’s conclusion on the counterfactual. The Tribunal unanimously concluded that the second ground of Stagecoach’s application succeeds to the extent and on the basis set out in the judgment.

The Tribunal found that it was not necessary to come to a conclusion on the third ground. On the fourth ground, the proportionality of the remedy, the Tribunal concluded that the challenge on that ground succeeded to the extent that follows on from the success of the second ground. The Tribunal indicated that it would hear further submissions from the parties on the form of an appropriate order.