On December 14, 2005, the European Court of First Instance (“CFI”) denied the application of General Electric Company (“GE”) and Honeywell International (“Honeywell”) for annulment of the merger prohibition issued by the European Commission (“Commission”) of July 3, 2001.1 There, the Commission declared that the acquisition of the assets of Honeywell by GE would be a “concentration incompatible with the common market”. A concentration which creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market, or a substantial part thereof, is declared incompatible with the common market. 2
In a lengthy opinion, consisting of 735 numbered paragraphs, the CFI upheld the Commission’s merger prohibition decision, and held that the horizontal effects of the proposed acquisition were sufficient to establish that the Commission’s merger prohibition was well founded. However, it noted further that the Commission committed “manifest errors of assessment” with regard to the effects of the merger on particular markets. Specifically, it found that its analysis of “conglomerate effects” resulting from the concentration was erroneous, as the Commission was required to establish that there was a “high probability that the anti-competitive effects will occur and not merely that they might occur.” The CFI held that the Commission “must quantify those effects and show that they will result from the merger rather than from pre-existing market conditions”.3 The CFI further stated:
“That requirement is particularly important in cases such as the present, in which the merger is conglomerate, since it is accepted that such mergers rarely have anti-competitive effects.”4
The decision may manifest a significant level of convergence between European Community and United States antitrust merger analysis and policy.
Background. On October 22, 2000, GE and Honeywell announced their plans to merge. After the United States Department of Justice informally indicated that it would allow the merger to proceed, subject to “fix it first” remedies, the parties filed their notification with the Commission. The Commission, however, found the “remedies” commitments insufficient, and blocked the merger. As the parties were prohibited to put the merger into effect in the European Community (“EC”), it was abandoned. The parties thereafter filed an application for annulment of the Commission’s decision.
The CFI held that in the context of the proceedings before the Commission, it validly found that the merger would have created or strengthened dominant positions, as a result of, which effective competition would have been significantly impeded in three markets. The CFI held that the horizontal effects of the proposed merger were sufficient to establish that the Commission’s merger prohibition decision was well founded. The CFI upheld the Commission’s finding that the merger would have significantly impeded competition in: (i) the market for jet engines for large regional aircraft; (ii) the market for engines for corporate jet aircraft; and (iii) the market for small marine gas turbines.
The CFI concluded that in the first market, GE had a pre-existing dominant position. In the other two markets, the merger would have strengthened the pre-existing dominant position and further, would have created dominant positions for the merged entity in the markets for engines for corporate jet aircraft, and for small marine gas turbines. Each of these markets would have created or strengthened a dominant position which would have resulted in effective competition being significantly impeded in the common market.
However, the CFI noted that the Commission’s decision constituted “manifest errors of assessment” in the following particulars:
- The part of the Commission’s decision relating to the vertical overlap between Honeywell’s engine starters and GE’s engines was considered to be unfounded. The Commission failed to take in to account the deterrent effect of EC Article 82. The Commission must show that this condition is established to a “high probability” that anticompetitive effects will occur, and not merely that they might occur. It is incumbent upon the Commission to quantify these effects and show that they will result from the merger, and not merely result from pre-existing market conditions. The CFI added “this ‘requirement is particularly important in cases such as the present, in which the merger is conglomerate, since it is accepted that such mergers rarely have anti-competitive effects.'”5
- The Commission did not establish to a sufficient degree of probability that the merged entity would have bundled sales of GE engines with Honeywell’s avionics and non-avionics products. Thus, it failed to demonstrate with sufficient probability that dominant positions would have been created or strengthened in such markets.
The CFI affirmed the Commission’s finding that a market share of 50%, except in exceptional circumstances, constituted prima face evidence of a dominant position, and warranted a conclusion that GE’s pre-existing market position was dominant. The case is non-remarkable, in that confirms that the strengthening or creation of a dominant position, may amount to proof of a significant impediment to effective competition.
Significance. The rejection of the Commission’s conglomerate merger economic effects analysis may be viewed as concrete movement toward greater convergence with United States antitrust merger policy. In fact, the rejection by the CFI of the Commission’s conglomerate merger economic effects theory is the second rejection on the issue this year. Previously, the CFI overturned a Commission decision to block a merger between Swedish packing giant Tetra Laval and a French company, Sidel.6 In Tetra Laval, the CFI overturned the Commission’s decision to prohibit a proposed merger on the basis that the Commission failed to prove that a merged entity would not only have the ability to harm competition, but that it would, in fact act anti-competitively. In GE/Honeywell, however, while the theory of anti-competitive conglomerate effects formed the basis of the Commission’s decision, it was unnecessary to the decision, as the merger’s horizontal effects were sufficient in themselves to establish that the concentration was incompatible with the common market. The CFI held that the Commission did not sufficiently establish that the merged entity would have bundled sales of GE’s engines with Honeywell’s avionics and non-avionics products. It held that in the absence of such bundled sales, the mere fact that the merged entity would have a wider range of products than its competitors was not sufficient to establish that dominant positions would have been created or strengthened in the different markets involved. Accordingly, the Commission made a “manifest error of assessment” in prophesizing, but not proving, the probability of actual effects flowing from a conglomerate merger.
By definition, conglomerate mergers involve firms that are not actual or potential competitors, and do not have an actual or potential customer-supplier relationship.7 Challenges to conglomerate mergers generally have been limited to cases where an anticompetitive effect was alleged in one of the markets affected by the merger.8 Thus, while the rejection of the Commission’s conglomerate merger economics effects theory constituted “manifest error”, it was harmless error. This is because, as the CFI observes, the application for annulment was properly rejected, as the Commission’s decision was based on a combination of elements of fact and law which were complimentary, and not exclusive. It was clearly sufficient to justify a prohibition on the concentration to find that there were pre-merger dominant positions that would have been strengthened as a result of the merger.
Nevertheless, the decision should be welcomed by United States antitrust enforcers. Commenting on the European Commission’s application of conglomerate merger economic theory, in its analysis of the proposed acquisition of Honeywell by GE, Assistant Attorney General for the Antitrust Division, Charles A. James observed that the reasoning was “antithetical to the goals of sound antitrust enforcement.”9
While several early United States cases held that conglomerate mergers could violate Section 7 of the Clayton Act by entrenching the position of a dominant firm, the United States enforcement agencies have applied the theory very cautiously.10 The application of conglomerate merger economic effects theory has not resulted in a United States court finding liability on this theory, at least since the 1970’s.11
Finally, it should be noted that the decision of the Court of First Instance has been well received by the Commission. Competition Commissioner Neelie Kroes stated,
“I am pleased to welcome this important ruling insofar as it upholds the Commission’s decision. The Commission will consider carefully what lessons may be learned from this judgment for our future merger policy. The ruling illustrates that in such complex transactions it is crucial for merging parties to come up with adequate remedies for all competition concerns identified by the Commission. Indeed, insuring effective competition throughout the aerospace products industry remains an important aim.”12
Is everybody happy? An appeal, limited to points of law, may be brought before the Court of Justice of the European Communities, within two months of its notification.
- Paragraph 78 at page 11.
- Tetra Laval v. Commission, Case T-5/02, ECR II-4381 (2002).
- See, ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS at 368 (2002).
- See, e.g., United States v. ITT Corp., 306 F. Supp. 766, 796 (D. Con. 1969), appeal dismissed, 404 U.S. 801 (1971).
- See, Charles A. James, Assistant Attorney General, Antitrust Division “International Antitrust in the 21st Century: Cooperation and Convergence, Remarks Before the OECD Global Forum on Competition (Oct. 17, 2001),” available at www.usdoj.gov/atr/public/speeches/9330.htm.
- See, FTC v. Procter & Gamble Co., 386 U.S. 568, 578 (1967) (conglomerate merger violated Section 7 by substitution of a powerful acquiring firm for a smaller incumbent, thus creating a likelihood that the competitive structure of the market would be substantially reduced, by raising barriers to entry, and by created umbrella effects, thus dissuading smaller firms from aggressively competing.).
- See, e.g., Emhart Corp. v. USM Corp., 527 F.2d 177 (1st Cir. 1975); NBO Indus. Treadway Companies v. Brunswick Corp. 523 F.2d 262, 274-75 (3rd Cir. 1975), vacated and remanded sub. nom, Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977). Early cases have also held that an acquisition could violate Section 7 where it created a substantial possibility for the creation of market foreclosure through reciprocity dealing. See, e.g., FTC v. Consolidated Foods Corp., 380 U.S. 592 (1965).
- European Commission Press Release, December 14, 2005, IP/05/1601.
Don T. Hibner, Jr.