The European Court Of First Instance Annuls, For The First Time, An EU Merger Decision Approving A Concentration

Today, the European Court of First Instance (CFI) broke new ground by annulling for the first time a decision by the European Commission (“Commission”) to approve a merger, the integration of the global recorded music activities of the two media companies Bertelsmann AG (“Bertelsmann”) and Sony Corporation of America (“Sony”). Although the judgment may well be appealed to the European Court of Justice, it raises fundamental questions as to the possibility of “de-merging” already merged businesses. The Commission has previously been under pressure from the Courts for incorrectly blocking notified mergers. Now the Commission will also find itself under pressure not to approve mergers without adequate justification.

In addition to this fundamental question, the judgment is important because it opens up the possibility that the Commission could establish the existence of collective dominance indirectly, without positively ascertaining that the various conditions for such dominance are fulfilled.

Finally and interestingly, despite its complete victory, the Court ordered the applicant to bear one quarter of its own costs in the proceedings, because it had unacceptably slowed down the court process.

In 2004, Bertelsmann and Sony notified to the Commission their intention to merge their global recorded music activities into three companies operated together under the name Sony BMG. The Commission came to the preliminary conclusion that the concentration was contrary to EU competition law. However, after hearing the parties, the Commission finally approved the merger.

Impala, an international association of independent music production companies and a third party in the proceedings before the Commission, challenged the Commission's decision in the CFI and was granted expedited procedure. In the judgment issued on 13 July 2006, the CFI decided for the applicant. The Court came to the conclusion that the Commission had not satisfactorily demonstrated that the merging companies were not collectively dominant before the merger or that there was no risk that a collective dominant position would be created as a result of the concentration.

Impala had claimed that the Commission used insufficient reasoning and erred in its legal and factual assessment when examining the conditions for such dominance established in previous case-law, i.e. transparency, deterrence and restraints (Airtours v Commission). Although the Court confirmed that these conditions have to be met in each individual case, it stated that, in some circumstances and in the absence of an alternative explanation, in particular the transparency condition could be established indirectly from various factors in the case. However, since Impala had based its arguments on the incorrect applications of the individual conditions for collective dominance, the CFI examined these in turn. The Court rejected the Commission's arguments with regard to the absence of sufficient transparency on the markets for recorded music and stated that the Commission erred in law concerning likelihood of retaliation, the two primary grounds on which it had based its decision.

Notwithstanding Impala's complete victory in the case, the Court also ordered the association to bear one quarter of its own costs in the proceedings, because, despite being granted expedited procedure, Impala had unacceptably slowed down the court process.

The Commission now has to decide whether to appeal the CFI decision. If they decide against this, the Commission would have to re-assess the concentration in the light of current market conditions. Bertelsmann and Sony may have to supplement their original notification to render it complete in the new circumstances. If the Commission prohibits the concentration, Sony BMG, which was already established in August 2004, would likely have to be de-merged and the recorded music activities of Bertelsmann and Sony separated.