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.  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.
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, 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:
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.
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.
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.
 Case C-413/06 P.
 Case T-464/04.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or Peter Alexiadis (+32 2 554 7200, [email protected]) or Miranda Cole (+32 2 554 7201, [email protected]) in the firm’s Brussels office.
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