UK: The Commission’s Liability For Bad Merger Decisions

Last Updated: 24 September 2009

Article by Gordon Christian and Simon Holmes*

Originally Published in Competition Law Insight

A Look At The Commission's Exposure Following The MyTravel And The ECJ's Judgment In Commission v Schneider Electric

Two years ago (in "Blocking mergers unlawfully", CLI 25 September 2007), the authors analysed the judgment of the European Court of First Instance in the Schneider Electric v Commission case. That case was a milestone in EC competition law as it was the first time that the Community Courts had confirmed that the European Commission could, in EU parlance, be "non-contractually" liable (that is to say, be liable in tort) for an unlawful merger prohibition decision if certain conditions were met. However, although the case reverberated through the competition community, many practitioners cautioned at the time that, even though the principle had been established, the paucity of merger prohibition decisions – and the significant hurdles put into an applicant's way by the CFI judgment – were likely to confine the potential effects of the CFI's judgment to a small handful of current and possible future cases.

As soon as it became clear that, as expected, the Commission was going to appeal against the CFI's judgment to the European Court of Justice, many wondered (as the authors' previous article in 2007 had asked) whether the Commission would be able to reclaim some lost ground when the ECJ ruled on the matter. For the reasons set out in more detail below, the authors believe that the Commission has indeed managed to convince the European Court of Justice to retreat from the high-water mark set by the CFI's judgment in Schneider Electric v Commission.

MyTravel Case

Nearly a year after the CFI published its judgment in Schneider Electric v Commission, the CFI had another opportunity to apply the new principles to a very different set of facts in the MyTravel case. This concerned the Commission prohibiting the merger between UK package holiday companies Airtours and First Choice in September 1999.

As in Schneider Electric in 2007, the CFI considered whether the three requirements for non-contractual liability to arise had been met. First, the Commission's conduct needed to be both unlawful and a sufficiently serious breach of a rule of law designed to protect individuals. Second, the recipient of the unlawful merger prohibition decision must have suffered loss and, third, there must be a causal link between the unlawful merger prohibition decision and the loss alleged to have been suffered.

However, in contrast to Schneider Electric v Commission, where the CFI had held that a significant procedural error (relying on facts in the final decision that had not been relied on in the statement of objections, hence infringing Schneider Electric's rights of defence) had been committed, MyTravel sought to argue the case solely on the Commission's substantive errors of assessment. This was clearly going to be a more difficult proposition, as it has been well established since the Schöppenstedt case in the early 1970s that the Community Courts give the Commission some degree of leeway if the Commission has a margin of discretion concerning the act that is alleged to have given rise to loss. In other words, the Community Courts have generally not been keen to replace the Commission's decision on the merits of a particular case with their own decision on the merits.

As a result, MyTravel was unsuccessful in its attempt to gain compensation for losses it estimated at more than £500m that had allegedly resulted from the Commission's merger prohibition decision. This was despite the fact that, in its earlier judgment annulling the Commission's merger prohibition, the CFI had been highly critical of the Commission's analysis in the merger prohibition decision. In a nutshell, the reasons why the CFI decided that the Commission's faulty analysis did not constitute a sufficiently serious breach (and therefore failed to satisfy the second limb of the first condition for non-contractual liability to arise) was that the Commission had a margin of discretion in complex Phase II merger investigations, and that due account needed to be taken of time constraints imposed by the EC Merger Regulation.

The Commission v Schneider Electric Case

The Schneider Electric/Legrand transaction was notified to the Commission on 16 February 2001 and completed in August 2001. On 10 October 2001, the Commission found the merger to be "incompatible with the common market", mainly in relation to the markets for electrical switchboards and wiring accessories. On 13 December 2001, Schneider applied to the CFI to annul the 10 October 2001 incompatibility decision, but this was dismissed by the CFI on 23 January 2002. Shortly thereafter, on 30 January 2002, the Commission ordered Schneider to divest itself of Legrand in order to deal with the competition concerns identified.

On 18 March 2002, Schneider brought a further action before the CFI to annul both the divestment order and the October 2001 decision that the merger was incompatible with the common market. While the appeal was pending, Schneider took preparatory steps to divest Legrand in the event the Commission's decision was upheld. To this end, Schneider entered into a contract of sale with Wendel/KKR on 26 July 2002. This contract was due to expire on 10 December 2002 and, in the event that Schneider pulled out of the deal, a break fee of €180m was payable to Wendel/KKR.

The CFI, on 22 October 2002, found that the Commission had committed a serious procedural irregularity (described above). Both the prohibition decision and the divestment order were annulled and the Commission reopened its investigation into the merger, starting its investigation from Phase I. However, as the Commission continued to assert in the second investigation that a combination of Schneider and Legrand was likely to give rise to significant competition issues, and as Schneider wished to avoid paying the break fee to Wendel/KKR, Schneider chose to abandon the merger and sell Legrand to Wendel/KKR at a loss of €2bn. Schneider argued that it needed to sell Legrand to Wendel/KKR at a loss as, at the time of the sale, the prospect of a further merger prohibition decision in the Commission's second review of the merger was still looming and that, without such a prospect, the price that an acquirer may have paid for Legrand would have been higher.

Schneider Electric then sued the Commission for losses that it claimed it had incurred as a result of the Commission's merger prohibition decision which had been annulled by the CFI. As the authors analysed in their previous article on this topic, the CFI did not accept Schneider Electric's arguments that the Commission's substantive errors had given rise to non-contractual liability. This approach played some part as a precedent for the later (and very similar) CFI judgment in MyTravel already referred to above.

However, the CFI did accept that the Commission's serious procedural irregularity was sufficiently serious to give rise to non-contractual liability on the Commission's part for most of the losses that Schneider claimed it had suffered.

The Commission's Appeal

The Commission appealed against the CFI's judgment to the ECJ on a number of grounds.

First, the Commission claimed that the CFI had erred in classifying the serious procedural infringement as capable of being "sufficiently serious" to fulfil the first condition of the test concerning non-contractual liability. However, the ECJ had little sympathy with this argument and agreed with the CFI that the Commission's failure to set out, in the statement of objections, an issue that was relied on in the Commission's decision was sufficiently serious to give rise to non-contractual liability for an unlawful merger prohibition decision.

Second, the Commission argued that the CFI had mistakenly held that there was a sufficiently direct causal link between the wrongful act and the losses allegedly caused to Schneider as a result. The CFI had concluded that the causal link existed because Schneider had incurred a loss related to the depreciation of Legrand for the additional time it was taking (after the Wendel/KKR deal had been signed) in order to gain clarity from the CFI on the legal status of the entire – and, by that time, highly complex and convoluted – transaction.

However, the ECJ, agreeing with the advocate general's opinion on this point, found that Schneider's actions in selling Legrand to Wendel/KKR at the time that it did were motivated primarily by the fact that the European Commission continued to indicate, even in its second review of the transaction, that the transaction may not be compatible with the common market. In other words, if Schneider was going to have to sell Legrand at the end of the second Commission review of the transaction in any event, it was in fact Schneider's persistent attempt to acquire a competitor which (on competition grounds) it should not have been able to acquire that was the cause of Schneider's loss, rather than the Commission's unlawful merger prohibition decision.

This was therefore a costly outcome for Schneider, as the only head of damages on which the ECJ agreed with the CFI was that Schneider should be able to recover the costs it had incurred when participating in the Commission's second merger review (after the first one had been vitiated by the Commission's significant procedural irregularity).

Low Chances Of A Successful Action

After the ECJ's judgment in the Commission v Schneider Electric case, it is important to appreciate that the broad principle first established by the 2007 CFI judgment in Schneider Electric v Commission – namely, that the Commission can be non-contractually liable for unlawful merger prohibition decisions – still stands. However, the recent CFI and ECJ case law on the matter has given clear guidance on key issues that potential claimants must bear in mind.

As regards the first condition, namely that the Commission must have committed a sufficiently serious breach, it appears very difficult, after the CFI's judgments in Schneider Electric v Commission and MyTravel, for the Commission's erroneous (and likely annulled) substantive analysis of the competitive effects of the merger to lead to non-contractual liability. On the other hand, as confirmed by the CFI (and not overruled by the ECJ) in Commission v Schneider Electric, if the Commission makes significant procedural errors, this may well still give rise to liability

Another point to bear in mind, particularly after the ECJ's judgment in Commission v Schneider Electric, is that the claimant must ensure that all three conditions are fulfilled; in other words, that the required causal link between the unlawful behaviour and the alleged loss is also proved. It is in some ways understandable that a party seeking damages from the Commission will put a lot of emphasis on showing that the alleged illegality is sufficiently serious. However, the Community Courts have vividly shown that parties who gloss over the other requirements do so at their peril.

Ultimately, given that there are so few Commission merger prohibition decisions, the main effect of the recent case law is likely to be that, although in practice the risk of a successful non-contractual liability damages action against the Commission is low, the Commission must remain vigilant, particularly in upholding merging parties' procedural rights to the fullest extent required by law.

Footnote

* Gordon Christian is an associate with – and Simon Holmes is a partner in – SJ Berwin LLP (London)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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