On February 15, 2005, the European Court of Justice (“ECJ”) rejected an appeal by the European Commission against the judgment of the Court of First Instance (“CFI”), annulling the Commission’s decision prohibiting the merger between Tetra Laval and Sidel.
On October 30, 2001 the Commission had prohibited Tetra Laval’s acquisition of Sidel under the old EC Merger Regulation. The Commission had concluded that the combination of Tetra’s dominant position in the market for carton packaging, with Sidel’s leading position in polyethylene terephthalate (“PET”) plastic packaging equipment, would potentially create a dominant position in the market for SBM machines in the European Economic Area. The Commission relied on the economic theory of leveraging to hold that Tetra’s dominance in one market (the market for equipment and consumables for carton packaging) could be used to pressure customers into purchasing products (Sidel’s SBM machines) in another distinct, but closely related and potentially converging market.
Tetra had offered a package of remedies to try to address the Commission’s concerns (including a commitment that it would not engage in abusive conduct) but these had been rejected. Tetra had already acquired about 95% of Sidel’s shares in reliance on the public bid exception to the suspensory provisions of the EC Merger Regulation. Therefore, under a second decision in January 2002, the Commission had ordered Tetra to dispose of its shareholding. Tetra appealed both the Commission’s decisions to the European Court CFI.
On October 25, 2002, the CFI annulled the Commission’s decisions (Cases T-5/02 and T-80/02, Tetra Laval BV v. Commission). The CFI found that the Commission had made manifest errors of assessment with regard to the conglomerate effects of the merger. The CFI confirmed that while the Merger Regulation allowed, in principle, the prohibition of conglomerate mergers, the Commission’s analysis of such mergers requires a particularly close examination of the relevant circumstances and the effects on competition, and it must produce “convincing evidence” of the creation or strengthening of a dominant position. In this case, the Commission had not provided sufficient evidence of the leveraging methods that Tetra would be able to use to acquire a dominant position in the relevant markets or of the potential consequences of any such action. It had also not taken sufficient account of the impact of the proposed commitments.
The Commission brought an appeal against the CFI’s judgment alleging that the CFI had committed various errors of law in applying the standard of proof, and in not upholding the Commission’s findings in relation to market definition and dominance.
The ECJ rejected all the grounds of appeal raised by the Commission. In particular, it held that although the Commission has a margin of discretion in assessing economic matters, it does not prevent the Courts from reviewing the Commission’s interpretation of economic information. A Court must determine whether the evidence relied on:
- Is factually accurate, reliable and consistent;
- Contains all the information which must be taken into account in order to assess a complex situation; and
- Is capable of substantiating the conclusions drawn from it.
The ECJ held that such a review is all the more necessary in the case of a prospective analysis conducted in respect of a merger with conglomerate effects (paragraph 39). The CFI was correct, therefore, to find that the analysis of a merger producing a conglomerate effect requires a close examination of the relevant circumstances. The analysis of a conglomerate type merger (like the analysis of a collective dominance situation) involves a prospective analysis of the reference market including, in this case, both future market conditions and the necessary leveraging. As such, the chains of cause and effect are “dimly discernible, uncertain and difficult to establish” (paragraph 44). Accordingly, the Commission must produce convincing evidence of anticompetitive effects before it can prohibit a merger.
The ECJ held that the CFI was also right to hold that the likelihood of Tetra engaging in conduct essential to leveraging must be examined comprehensively, taking into account the incentives to adopt such conducts and factors (including the possibility that such conduct would be unlawful) liable to reduce or eliminate those incentives. However, it was not necessary for the Commission to examine the extent to which the incentives to adopt anti-competitive conduct would be reduced or eliminated as a result of its unlawfulness, the likelihood of detection, the action taken by regulatory authorities or by the possibility of financial penalties. This would require the Commission to engage in a speculative assessment.
Finally, the ECJ confirmed the CFI’s holding that the Commission’s annulment decision had failed to take into account the commitments submitted by Tetra with regard to its future conduct. The ECJ held that the Commission has a duty to consider both structural and behavioral remedies proposed by merging parties in order to alleviate any competition concerns arising from the transaction.
The result of the ECJ decision is that the Commission will exercise much greater care in the examination of complex mergers raising potential conglomerate effects. If there are no horizontal issues arising from merging the parties’ businesses, the Commission will need robust economic evidence in order to block a merger based on this novel, and much criticized theory. Conglomerate effect concerns were also at the heart of the Commission’s merger prohibition decision in General Electric/Honeywell, which is currently on appeal to the CFI, and a decision is expected later this year.