EU Competition Law: European Court of Justice Sends Sony BMG Back to the CFI

July 14, 2008

The European Court of Justice’s ("ECJ") 10 July 2008 Sony BMG judgment should halt the rise of the Statement of Objection-less Phase II merger investigation. [1]  In confirming that the Commission is under no obligation to explain why it has abandoned objections raised in a Statement of Objections ("SO") by the time it takes its final decision, the Court has materially lowered the Commission’s risk of third party appeal.  However, in doing so, the Court may well have materially raised the bar for the CFI when considering a challenge to the veracity of the facts on which the Commission has relied.

Background

On 19 July 2004, the Commission approved the concentration of the global recorded music businesses of Bertelsmann AG and Sony (with the exception of Sony’s activities in Japan) into three newly created companies to be operated under the name Sony BMG.

Following an action brought by Impala, an international association of independent music production companies, the Court of First Instance ("CFI") annulled that decision by judgment of 13 July 2006,[2] on the grounds that it was vitiated by manifest errors of assessment and was inadequately reasoned.

As a result of that annulment, the Commission carried out further review proceedings relating to the joint venture, and approved the creation of Sony BMG for a second time on 3 October 2007, again without imposing any conditions or stipulations.

At the same time as those proceedings were taking place, Bertelsmann and Sony brought an appeal before the ECJ against the judgment of the CFI, claiming that that court had overstated the legal requirements to be applied in relation to a Commission decision approving a merger and that court’s role in carrying out judicial review.

Findings of the Court

The ECJ found that the CFI had committed errors of law in concluding that the Commission’s 2004 decision approving the joint venture creating Sony BMG was vitiated by manifest errors of assessment and was inadequately reasoned.  It found that the CFI had committed a number of errors of law in its judgment, in that it:

  • did not merely use the SO as a basis for verifying the correctness, completeness and reliability of the factual material underpinning the contested decision.  Rather, it treated certain of the conclusions set out in that statement as established, when those conclusions could only be considered to be provisional.
  • essentially required the Commission to apply particularly demanding probative standards to the evidence and arguments put forward by Bertelsmann and Sony in reply to the SO.
  • found that the Commission’s failure to conduct additional market investigations after issuing the SO and its adoption of the arguments in defence put forward by Bertelsmann and Sony amounted to an unlawful delegation of the investigation to the parties to the concentration.
  • relied on documents submitted by Impala on a confidential basis, since the Commission itself could not have used them for the purposes of adopting its decision, because they were confidential.
  • misconstrued the legal criteria applying to a collective dominant position arising from tacit coordination, and failed to carry out its analysis of market transparency in the light of a plausible theory of tacit coordination.  The ECJ found that the assessment of the relevant criteria, including the transparency of the market, must be carried out using the mechanism of a hypothetical tacit coordination as a basis, rather than in an isolated and abstract manner.
  • was not in a position to find that the Commission had failed to comply with the duty to provide an adequate statement of reasons for the decision.  The ECJ noted that the Commission’s decision showed its reasoning in a way which subsequently allowed a party such as Impala to challenge its validity before the CFI.  Furthermore, the CFI was aware of the Commission’s reasons for approving the concentration, and devoted numerous paragraphs in its judgment to the analysis of whether those reasons were well founded.  

The ECJ set aside the judgment of the CFI.  However, because the CFI had considered only two of the five pleas relied on, the ECJ found that it was not in a position to give a ruling on the dispute, and referred the case back to the CFI.

Comment

Judicial review of the facts?

The ECJ’s findings as to the role of the SO in the CFI’s consideration of the correctness, completeness and reliability of facts underpinning a contested decision raise the bar even further for the CFI when reviewing the correctness, completeness and reliability of the facts on which the Commission has based a decision. 

Having reaffirmed that the Commission is under no obligation to maintain the factual or legal assessments set out in the SO or, for that matter, to explain differences between those assessment and assessments made in its ultimate decision, the ECJ went on to confirm that the CFI can use an SO to interpret a Commission decision, particularly in relation to the facts on which it is based. 

On the facts, the ECJ was of course considering a judgment in which the CFI had apparently decided that the "findings of fact made previously" (i.e., in the SO) were more reliable and conclusive than the findings in the contested decision itself.  The ECJ neatly avoided having to deal with the relative probative value of conflicting findings of fact, by finding that the CFI had erred, in effectively taking the view that changes to findings of fact between an SO and the final decision must be justified.  The ECJ characterized the CFI’s approach as treating a particular category of conclusions set out in the SO as being established.

The ECJ’s approach appears to create the risk of an odd dichotomy: where the CFI is merely seeking to affirm the Commission’s characterization of the facts in a decision, it is free to look to the SO to do so, and to confer some probative value on the SO; however, where it has reservations about the correctness or reliability of the facts as stated in a decision, it will find it difficult to use the earlier characterization of the (factual) conclusions drawn in the relevant SO. 

While it is appreciated that, particularly in complex cases, the Commission may sometimes struggle to grasp all of the factual nuances by the time that it issues an SO, this judgment further erodes the ability of the CFI to judicially review the correctness, completeness and reliability of the facts on which the Commission bases its decisions, allowing the Commission to revise the facts without explanation.  

The judgment may also mark the end of a period in which the risk that objections raised in an SO could be used against the Commission (by third parties appealing a clearance decision) made the Commission cautious in taking the decision to issue an SO. 

Collective dominance

The ECJ’s reminder that the Airtours collective dominance criteria should not be applied in a mechanical fashion, with each criterion applied in isolation, taking no account of the overall economic mechanism of hypothetical tacit coordination, reaffirms the need to apply to test "in the round".  In this, it seems to support the Commission’s attempts in recent years to apply greater economic rigor to its decision-making – supporting the use of "theory of harm" analyses.  

The Court has also reaffirmed that the onus rests on the Commission to show that the transparency required for hypothetical coordination to occur is actually present.  It must be plausible that the undertakings could reach a common understanding on the terms of coordination and that they would have the ability to actually monitor compliance.  So, while the test is hypothetical, it is not fanciful.

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[1]  Case C-413/06 P.

[2]  Case T-464/04.

Gibson, Dunn & Crutcher LLP

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