• The Tetra Laval Appeal -- A Clarification of Standards of Judicial Review in Merger Control Cases
  • March 8, 2005
  • Law Firm: Gibson, Dunn & Crutcher LLP - Los Angeles Office
  • The Judgment of the European Court of Justice ("ECJ") on 15 February 2004 in Commission v. Tetra Laval BV (Cases C--12/03 and C-13/03 P) has brought much needed clarity as to the nature of the burden of proof on the European Commission in relation to Decisions taken under the EC Merger Regulation. It also gives clear guidance as to the permissible extent of judicial review by the Court of First Instance ("CFI"). As a result, it is now clear that:

    (1) The powers of judicial review of Commission Decisions by the CFI are limited to deciding questions of law, and not questions of fact. Consequently, it is not the role of the CFI to second-guess the Commission on issues such as the precise scope of a relevant market, the extent to which a dominant position has been strengthened, or the extent to which foreclosure is likely to occur. In other words, the Commission enjoys a degree of discretion in its interpretation of economic data. That margin of discretion should not be interpreted as a "margin to get it wrong", but merely allows the Commission the benefit of the doubt of difficult issues of judgment or interpretation. For example, one can often achieve what is tantamount to a de novo review by establishing a mistake as to material facts on the basis of an incorrect application of legal principle (i.e., a 50% market share calculation cannot be correct as a matter of fact if it also includes turnover generated from products falling outside the relevant product market as a matter of law; even if the precise market share is in theory not capable of judicial review, the means by which it was deduced is reviewable and could result in an annulment).

    (2) The discretion which the Commission enjoys in interpreting economic data should not be seen as being an unfettered one. Because it needs to conduct a forward-looking analysis of mergers in the exercise of its powers under the EC Merger Regulation, it will often be confronted with a number of possible scenarios as to the shape of the future competitive environment. In choosing between competing economic arguments, it cannot rely on evidence which is insufficient, inconsistent or inaccurate, and the CFI can review whether it has done so. On the other hand, it is not incumbent upon the Commission to explore every possible hypothetical scenario and to subject it to rigorous economic analysis. The burden of proof is therefore restricted to those scenarios upon which the Commission relies to support its case. This particular principle will be particularly important when the vexed issue of whether "efficiencies" or competitive harm is being generated by the transaction (a topic which has caused much trans-Atlantic consternation recently). Thus, to the extent that the Commission wishes to argue that the notified transaction is likely to produce anti-competitive effects, the burden of proof will shift to the Commission to prove that this scenario is specific to the notified merger under review. This amounts to a fair balance between the interests of the Commission and notifying parties, since if the latter wish to argue that a proposed merger produces efficiencies, it must discharge the burden of proof that those efficiencies are specific to the notified merger.

    (3) In determining the extent to which anti-competitive effects might flow from a proposed merger, the Commission is obliged to take into account the fact that one or both of the companies to the proposed merger have offered undertakings intended to remedy those effects. The assessment of undertakings is now a central and integral part of the Commission's overall analysis, and is not incidental to it. Even if those undertakings are, strictly speaking, voluntary in nature, the Commission is obliged to review their effectiveness fully. The fact that those undertakings are behavioral in nature (i.e., relate to specific business practices) as opposed to structural (i.e., provide for certain assets, whether tangible and/or intangible, to be divested) is immaterial. On the other hand, it would be too speculative for notifying parties to hide behind the fact that their future anti-competitive actions could be addressed by competition rules designed to police anti-competitive agreements (Article 81EC) or unilateral conduct (Article 82EC) as a means of avoiding a negative Commission decision. Such an approach would, taken to its logical extreme, render merger control review superfluous.

    Questions of evidence and the burden of proof are key components of a fair system of administrative law and judicial control. The merger control review process has been an attractive means by which a competition regulator can extract pro-competitive concessions from a dominant undertaking or undertakings. However, in this Judgment, the ECJ recognizes that there are, and should be, limits to this process. It seems to have struck a fair balance between allowing the Commission to carry out its job in a fair and efficient manner whilst giving affected parties recourse to a court of law if the Commission falls below that standard. There have been a number of recent positive developments in European merger review practice: this is another of them.