DG Comp faces the music

For the European Commission's competition department, this month has been a rollercoaster ride.

On 12 July, Microsoft became the first company ever to be fined under EU anti-trust law for failing to comply with a ruling. But just one day after Competition Commissioner Neelie Kroes had flexed her muscles against one of the world's biggest companies, the European Court of First Instance (CFI) struck down a Commission decision of 2004 allowing a merger between music giants, Sony and Bertelsman AG, to form Sony BMG.

Sony BMG Chief Executive Officer Rolf Schmidt-Holtz echoed the view of many when he declared that "no one could have anticipated this judgment".

IMPALA, the independent music companies' association, took a major financial risk in 2004 to challenge the Commission's decision. Many observers dismissed IMPALA's action at the time, saying the group was wasting its money.

This view was fuelled by the Commission's efforts to improve procedures following a number of adverse rulings which embarrassed Mario Monti, the then competition commissioner.

In a series of cases (Tetra Laval-Sidel, Airtours-First Choice and Schneider-Legrand), the court overturned the Commission's decision to ban the respective mergers, saying that the competition directorate-general (DG Comp) had failed to prove there were sufficient grounds for opposing the company link-ups.

Following the court rulings, Monti sought a chief economist to establish a sounder economic basis for decisions and, among other reforms, set up an internal peer review or 'devil's advocate' procedure to improve the rigour of decision-making.

The decision to clear Sony BMG was the first taken after all these changes had been put into place.

Nevertheless, the CFI ruled on 13 July that the Commission had failed to substantiate "to the requisite legal standard" the key point of its arguments for approving the merger, ie, that the risk of collective dominance in the music market was prevented by the use of promotional discounts. The Commission had asserted that discounts reduced transparency in the pricing of companies' products such as CDs and music downloads, preventing one company from being able to know in advance at what level another would fix its prices. The court also said that the Commission had only carried out an "extremely cursory examination" of the possible creation of collective dominance after the merger.

The ruling delighted independent labels, especially as it appeared to support their argument that the Commission had performed a U-turn by approving the merger after it had issued a very strongly worded "statement of objections" (SO) - a list of the existing and potential problems in the market where the merger is taking place - stating the danger of collective dominance. IMPALA lawyer Helen Smith called the CFI ruling a "landmark judgment" because it had clarified the case law on collective dominance. She said it was also a victory for access to justice.

For many Brussels-based lawyers, one of the clear lessons of the case, following the 2002 rulings, is that the Commission had to justify its decisions to clear mergers just as thoroughly as decisions to block them. As one competition law specialist put it: "If in doubt, clear [mergers] but do your job properly." He added that companies were always nervous when the Commission cleared mergers - especially where they were likely to be challenged by third parties - because DG Comp was "likely to do a skimpy job". In particular, the Commission should ensure that SOs become more than just "a series of assertions".

For now, the Commission is ruling out any major changes to the reforms to the merger review process beyond small procedural improvements.

A spokesman for Commissioner Kroes said: "We may need to adjust the implementation of reforms but the ruling doesn't call [them] into question." One possibility is that the peer review process could be applied earlier so that the review team are better informed, although some lawyers say this will never deal adequately with the problem that the Commission still acts as judge and jury in merger cases.

IMPALA wants a full de-merger of the Sony and BMG as the only solution to problems in the music market. But competition law experts expect the tie-up to be cleared again when the Commission completes a second investigation.

But the Commission's image as a reliable merger control authority has been dented. Its reputation could suffer further if a greater focus in future on ensuring that decisions are legally watertight means that mergers in the EU take as long to go through clearance procedures as is typical in the US.

Johan Ysewyn, a partner at Linklaters' Brussels practice, says that the court's criticism of a lack of substance in the SO could increase the Commission's "hunger for information". In turn that might lead the Commission to drag out investigations, using the permitted "stop-the-clock" mechanism, so that merger timetables slip. The roller-coaster ride could be slower and less eventful.

For the European Commission's competition department, this month has been a rollercoaster ride.

• Primary Source