UK: Tetra Laval/Sidel Merger: European Court of Justice Supports Judicial
Review of EU Merger Decisions

On February 15, the European Court of Justice (the equivalent of the United States Supreme Court) upheld the Court of First Instance’s judgment overturning the European Commission’s decision to block the merger between Tetra Laval and Sidel. At stake was the scope of judicial review of the Commission’s opinions and the standard of proof and the sufficiency of the evidence needed by the Commission to support its opinions. A stinging legal defeat for the Commission, this decision affirms the right of the court to scrutinize its opinions to ensure that they are supported by sufficient economic evidence and consider mitigating factors when making predictive judgments.

Tetra Laval is the world leader in the carton packaging sector; Sidel is active in the PET (polyethylene terephthalate) packaging segment and manufactures a ‘stretch blow moulding’ machine (SBM machine) used in the PET packaging process. While Tetra and Sidel have a common customer base, they operate in different market segments and are not actual competitors, although in the future they may be.

In October 2001, the European Commission blocked this conglomerate merger. According to the Commission, the merger would have encouraged Tetra to ‘leverage’ its dominant position for carton packaging into a dominant position in SBM machines. The Commission’s theory was that Tetra would have pressured or incentivized customers switching to PET solutions to buy Sidel’s SBM machines, eliminating smaller rivals, representing an important source of potential competition. In addition, even though Tetra had entered into a number of commitments, including a commitment not to make joint offers for both its carton products and SBM machines, the Commission took the view that these behavioral remedies were insufficient and that compliance could not be easily monitored.

Following Tetra Laval’s appeal, in October 2002 the Court of First Instance (CFI) of the European Communities overturned the Commission’s decision, based on manifest errors by the Commission in its economic analysis of the likely effects of the merger. The Commission appealed the CFI’s decision to the European Court of Justice (ECJ) on five separate grounds. One involved the standard of proof the Commission is required to satisfy in reaching its merger decisions and the scope of the CFI’s judicial review of merger decisions. A second involved the Commission’s failure to consider mitigating factors in predicting future anticompetitive effects and the role of certain types of remedies. The remaining three related to whether the CFI had correctly interpreted certain facts.

The ECI specifically addressed the first two grounds of appeal and rejected the remaining ones because they were either unfounded or dealt with factual issues which are outside of the jurisdiction of the ECI, which is only able to consider legal issues on appeal.

The Court distinguished between two kinds of conglomerate mergers involving complementary products: (1) those that directly and immediately impact competition in the one market, due to the dominant position in the other market; and (2) those where the future conduct of the merged entity results in a situation where a dominant position in the second market is created or strengthened. The Court acknowledged that a conglomerate merger can be anticompetitive, stating that while conglomerate mergers are often considered as neutral or beneficial from a competitive standpoint, in neighboring markets, there is a possibility that one of the merger parties could leverage its dominant position in one market to acquire, relatively quickly, a dominant position in the other market.

Finding that the Tetra Laval/Sidel merger fell within the second category, requiring the Commission to use a prospective analysis, the Court held that the Commission has a margin of discretion, especially when evaluating economic matters. Nonetheless, the CFI has the right to review the Commission’s interpretation of economic information to determine if the evidence relied on is factually accurate, reliable and consistent and if the Commission has considered all information necessary to substantiate its conclusions. The fact that this case involved a prospective analysis made review by the CFI even more necessary, as the quality of evidence in such cases is even more important.

Many lawyers and companies may celebrate the decision as placing greater checks on the omnipotent European Commission. But the trend to overturn enforcers, which has also been affecting the FTC and DOJ, might ultimately backfire as it undermines their ability to protect consumers. This decision represents an important precedent and thus will likely impact the Court’s review of the GE/Honeywell merger expected later this year, another case that involves the anticompetitive effects of a merger between companies with largely complementary products.