Client Alert

European Court of First Instance Overturns the European Commission's SONY-BMG Clearance Decision

7/14/2006

On July 13, 2006 the European Court of First Instance (hereinafter the "CFI") for the first time reversed a decision of the European Commission (hereinafter the "Commission") approving, under the EU Merger Regulation, the creation of a joint venture by Sony Corporation of America (hereinafter "Sony") and Bertelsmann Music Group (hereinafter "BMG").[1]  

The CFI’s judgment should be seen as yet another episode in the crusade that it has conducted in the last four years to impose greater rigor in the Commission’s factual and legal analysis in merger cases.[2]  The CFI faulted the Commission on two of its technical findings relating to the absence of a collective dominant position in the recorded music market.  This does not mean that there is a deep difference of view between the CFI and the Commission concerning this or any other market.  The result of the judgment is that the Commission must conduct a new appraisal of the transaction under the Merger Regulation.  While in theory the Commission could find it illegal and order it to be undone, this is highly unlikely.

Background

The merger notified to the European Commission on January 9, 2004 combined the companies’ respective worldwide recorded music businesses, including the discovery and development of artists and the marketing and sale of their disks.  The Commission opened an in-depth second phase investigation of the proposed merger in February 2004.   It initially took the view that there existed a collective dominant position in the recorded music market that would be strengthened by the merger, and issued a statement of objections on that basis.  However, in the course of the proceeding, it changed its view and finally approved the merger, finding that there was no existing collective dominant position in the recorded music market, nor would one be created by the merger. 

The Commission’s treatment of the issue of collective dominance

In its evaluation of the proposed merger, the Commission applied the test for collective dominance as set forth by the CFI in the Airtours case.[3]  The following factors are considered to be decisive in ascertaining whether or not there is a collective dominant position:

  • Transparency, i.e. the ability of each member of the dominant oligopoly to be aware of the conduct of the others in order to check whether or not they are adopting the same course of conduct on the market;
  • Possibility of retaliatory measures, i.e. existence of deterrent mechanisms in response to a possible deviation by members of the dominant oligopoly from the common policy;
  • Inability of the outsiders (e.g. non-participating suppliers, consumers) to undermine the collective dominance of the participants.

Applying this test, the Commission found that the first two elements were not present in the recorded music market. 

As regards transparency, the Commission concluded that there was "insufficient transparency" on the market, in spite of the alignment of prices, because a certain category of discount (the campaign discount) was less transparent and presented a significant "fluctuation."   It also remarked that the heterogeneity of the products concerned (specifically in the content of albums) was counter-indicative of collective dominance and influenced market prices.

With reference to retaliatory measures, the Commission found that such measures had never been applied, and that therefore this element was not present. 

The Commission made no finding regarding the possible countervailing power of competitors and consumers.   

The CFI’s judgment

The CFI found that the Commission’s finding of lack of transparency was inadequately reasoned.  It observed that "the few assertions relating to campaign discount […] are imprecise, unsupported and contradicted by other observations in the decision and cannot demonstrate the opacity of the market."  It noted that the Commission’s decision itself identified specific factors indicating transparency (namely the public nature of gross prices, the limited number of referenced prices and the limited number of albums to be monitored). The CFI found that the Commission had required a particularly high level of transparency "greater than that necessary to permit a collective dominant position."

As regards retaliation, the CFI stated that in assessing the relevance of the historical absence of such measures, the Commission should also have considered whether there had ever been deviant conduct by the participants, and whether the facts indicated that retaliatory measures were available.  Since the decision did not contain any analysis of these points, the Commission’s finding was inadequate.

Additionally, the CFI criticized the Commission for not having carried out a prospective analysis on the changes in market conditions that would result from the Sony/BMG merger.

Conclusion

The judgment at issue, rather than having a revolutionary impact on the music industry, is in line with the CFI’s constant criticism of the Commission’s working methods which lead to its merger decisions lacking in coherence and economic know-how.

The practical result for Sony BMG is that the parties will have to re-notify the transaction and the Commission will have to restart its analysis of the merger. An appeal against the CFI, limited to the points of law, may be brought by the Commission before the highest court (the Court of Justice of the European Communities) within two months from the notification of the judgment.


Footnotes

[1] Case T-464/04, Independent Music Publishers and Labels Association (Impala) v. European Commission, judgment of 13 July 2006 available at: http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=rechercher&numaff=T-464/04 .

[2] See, for instance, Case T-5/02 ,Tetra LavalBV v European Commission; see Case T-310/01 Schneider SA/Legrand Electric SA.

[3] Case T-342/99.

 

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