European Court Issues Landmark Judgment on Mergers in Concentrated Markets
Court of First Instance told to reassess the Commission's clearance of the Sony/BMG joint venture
Two years ago, the EU Court of First Instance (CFI) stunned commentators, the parties and the European Commission by overturning the Commission's decision to clear a joint venture combining the recorded music businesses of Sony and Bertelsmann (BMG). In doing so, the CFI reduced the level of evidence needed to block a merger on coordinated effects grounds – i.e. in concentrated markets where there is no single dominant player post-merger – threatening to significantly increase the number of mergers blocked under EU law.
On July 10, 2008, the European Court of Justice (ECJ) set aside the CFI's judgment, re-establishing a high evidential burden in coordinated effects cases. In the key passages of the judgment, the ECJ emphasizes the need to avoid a check-list approach to the assessment of coordinated effects and to focus on "the overall economic mechanism of a hypothetical tacit coordination" (§125). To this extent, the ECJ re-affirms the skeptical approach to coordination theories first established in the CFI's Airtours judgment in 2002.
The ECJ was particularly critical of the CFI's finding that the relevant markets for recorded music were sufficiently transparent to allow coordination on the basis of "a very mixed series of indicia and items of evidence" (§127) since the CFI had not had regard to "a postulated monitoring mechanism forming part of a plausible theory of tacit coordination" (§130).
In an unusual step, rather than affirming the Commission's original decision to clear the joint venture, the ECJ sent the case back to the CFI for reassessment. This adds a further twist to an already complex regulatory saga. The joint venture was originally cleared by the Commission in 2004. That clearance was appealed to the CFI by IMPALA, a body representing a number of Sony and BMG's smaller European competitors. Following the CFI's decision annulling the Commission's clearance, the parties had to re-notify the joint venture, which had then been operating for more than two years, to the Commission, while at the same time appealing the CFI's judgment to the ECJ. After a protracted investigation, the Commission cleared the joint venture for a second time in late 2007. That second clearance has also been challenged by IMPALA. Thus, the CFI will now have to opine on this matter again, twice: once in relation to the first clearance that has been sent back to it by the ECJ and again in connection with IMPALA's challenge to the second Commission clearance. The parties will hope that the CFI's rulings are not subject to further appeals in the ECJ.
One issue highlighted by this complex procedure is the wide divergence between the EC and US merger control systems in the treatment of third party appeals from competitors. In the U.S., competitors generally have no standing to appeal merger control clearances, third party challenges to mergers are extremely rare and are rarely successful. In the EU system, competitors have virtually automatic standing and third party challenges have a good history of success.
For the full text of the judgment:
For the press release of the ECJ:
1st Commission clearance decision
2nd Commission clearance decision http://ec.europa.eu/comm/competition/mergers/
CFI judgment on IMPALA appeal
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