Originally published in Competition Law Insight, September 2007.
This article looks at how a merger launched in January 2001 and prohibited by the European Commission a year later has led to a landmark judgment in which the European Court of First Instance has confirmed for the first time that the Commission can be liable in tort for loss caused by an illegal merger prohibition decision.
The year 2002 was widely acknowledged as an annus horribilis for DG Comp at the Commission, then under the stewardship of Competition Commissioner Mario Monti. Having pushed the boat out with some bold prohibition decisions in a number of important merger cases, the Commission was brought back to earth by a series of significant defeats at the CFI.
Over the course of the summer and autumn of 2002, the CFI overturned three Commission decisions blocking mergers notified under the EC Merger Regulation (ECMR): in June 2002, the CFI annulled the prohibition of the Airtours/First Choice merger, and, within the space of three days in late October 2002, the CFI also annulled the Tetra Laval/Sidel and Schneider/Legrand decisions.
Although the reasons why the CFI overturned the three prohibition decisions were slightly different in each case, the shortcomings in the Commission's decision-making process were serious enough to trigger a root-and-branch revamp of how the Commission assesses mergers.
Among the procedural reforms initiated by the Commission around that time were independent peer review panels, earlier access to the file, the introduction of state-of-play meetings and greater access for the merging parties to third party comments on the proposed merger. Finally, a chief economist post was introduced to beef up the Commission's economic capability.
However, up until recently, a question that had been untested at CFI level was whether the Commission's annulled prohibition decisions under the ECMR could give rise to liability for damages to compensate for loss arising from such decisions. As the law stands at present, the answer to that question (in relatively limited circumstances) is yes.
Schneider/ Legrand background
Schneider Electric SA (Schneider) and Legrand SA (Legrand) are two large French industrial groups. Schneider notified its proposed acquisition of Legrand to the Commission on 16 February 2001. Following completion of the acquisition in August 2001, the Commission published its decision on 10 October 2001, stating that the merger was "incompatible with the common market". The markets that caused most concern were the markets for electrical switchboards, where the merged parties had combined market shares of between 40% – 70% in a number of countries, and the market for wiring accessories, with combined market shares in certain countries up to 90%. Although the Commission found that France was likely to be the country with the most severe competition issues, concerns were also raised in Denmark, Spain, Greece, Italy, Portugal and the UK.
The Commission then issued a second decision on 30 January 2002, ordering Schneider to divest itself of Legrand. Schneider brought an action for annulment of each of these two decisions; however, it prepared itself for the likelihood of having to divest Legrand in any event by entering into a contract for the sale of Legrand to the consortium Wendel/KKR on 26 July 2002, which had to be executed by 10 December 2002 at the latest.
First CFI judgment
The CFI annulled both the Commission prohibition decision and the divestment decision in its judgment of 22 October 2002. In relation to the prohibition decision, the CFI held that by advancing one of its objections to the merger for the first time in the decision itself, rather than in its statement of objections, the Commission had failed to have regard to Schneider's rights of defence, and had therefore committed a "serious procedural irregularity" and acted illegally.
Legrand sale
Following the annulment of its October 2001 prohibition decision and its January 2002 divestment decision, the Commission reopened its investigation into the merger in October 2002. However, due to the Commission's persistent doubts as to whether Schneider's proposed undertakings would be adequate to protect against a substantial lessening of competition, Schneider decided (despite having initially offered undertakings to remedy the Commission's concerns) to abandon the merger and execute the contract with Wendel/KKR on 10 December 2002. This was a move that cost Schneider, it claimed, up to €2bn.
Schneider then sued the Commission for damages under article 288(2) of the EC treaty (which regulates the noncontractual liability of Community institutions) for the loss caused to Schneider due to the illegal merger prohibition decision under article 8(3) ECMR.
Conditions for non-contractual liability
Article 288(2) of the EC treaty sets out the cumulative conditions that must be fulfilled before a Community institution can be held non-contractually (ie tortiously) liable for conduct by which it has caused loss to a third party.
First, the conduct alleged against the Community institution in question must be unlawful. This is usually the most difficult threshold to meet, as established case law provides that the conduct in question will not be unlawful within the meaning of article 288(2) of the EC treaty unless the Community institution has caused a "sufficiently serious breach" of a legal rule designed to confer rights on individuals. In turn, the breach will not be classed as "sufficiently serious" unless the Community institution in question "manifestly and gravely disregards the limits of its discretion". However, and, as will be seen below, importantly in this case, breaching a procedural requirement can also be a "sufficiently serious" breach.
Second, the party alleging loss must prove the extent of the loss caused by the allegedly unlawful behaviour. And third, the party claiming damages must prove the causal link between the allegedly unlawful behaviour and the loss suffered.
Applying article 288(2) conditions in Schneider/ Legrand
After the CFI annulled the merger prohibition decision in October 2002, Schneider sued the Commission for €1.66bn in damages that Schneider claimed to have suffered as a result of the illegal decision. Schneider put forward a host of reasons to support its case, including analytical errors made by the Commission and breach of procedural rights.
First, the CFI examined whether any of the allegations made by Schneider constituted a "sufficiently serious" breach of a legal rule designed to protect individuals. In this regard, the CFI disagreed with most of Schneider's arguments – for example, the CFI did not accept that the faulty economic analysis, which had been a contributory factor for the merger prohibition annulment decision, was "sufficiently serious" to give rise to non-contractual liability under article 288(2) of the EC treaty.
However, the CFI held that the Commission's failure to put an argument on which it partially based its merger prohibition decision to the merging parties in the statement of objections was a "flagrant and unjustifiable failing" of the Commission, and therefore constituted a breach which was "sufficiently serious" to satisfy the first condition of article 288(2) of the EC treaty. In taking this view, the CFI was heavily influenced by the specific protection in article 18 ECMR that each objection on which the Commission relies in its decision must be put to the parties. The CFI took the view that the Commission's failure to do so was one of the situations in which a "mere" procedural breach can fulfil the "sufficiently serious" test.
The CFI concluded that the Commission had an obligation to compensate Schneider for the harmful consequences of denying the merging parties their right of defence. The Commission was therefore obliged to compensate Schneider for the two heads of loss which the CFI considered sufficiently closely connected to the Commission's unlawful conduct (thereby fulfilling the second condition of article 288(2) of the EC treaty), namely:
- the expenses incurred by Schneider in participating in
the Commission's investigation following the
annulment of the Commission's decision on 22 October
2002; and
- the reduction in the divesture price that Schneider had
to concede to Wendel/KKR in order to obtain a postponement of
the divesture.
However, when considering the third condition of article 288(2) of the EC treaty – namely, the causal link between the unlawful conduct and the loss suffered – the CFI held that only two-thirds of the divestiture price reduction was payable, since Schneider had itself contributed to its loss in part by assuming the real risk that the merger would be declared incompatible even during the second Commission review, and that the divestment of Legrand would be inevitable.
A Commission spokesman has recently been quoted in the press as saying that on the basis of the CFI judgment, and taking into account the various heads of loss claimed but refused by the CFI, the Commission's final bill is likely to be substantially less than the €1.6bn claimed, possibly somewhere around €400m.
Possible consequences of the Schneider/ Legrand judgment
In terms of novelty, the Schneider/Legrand judgment – providing for an entirely new category of Community noncontractual liability for loss caused by illegal decisions under the ECMR – rivals cases such as Francovich in 1992, which provided for the first time that member states could be liable to individuals for wrongful implementation of directives. That said, its practical impact is likely to be limited for a number of reasons.
First, although there is one similar case pending at the CFI (the case formerly known as Airtours, now Mytravel, which is seeking over £500m), it involves allegations of analytical errors by the Commission rather than procedural errors (as in Schneider/Legrand). As the CFI set out in great detail in the Schneider/Legrand judgment, the Community institutions have a margin of discretion when dealing with complex economic issues such as Phase II merger reviews, so MyTravel may find it somewhat harder to be awarded damages. Second, the list of possible claimants is very short, as only two mergers have been prohibited during current Competition Commissioner Kroes' period in office, namely the ENI/EDP/GDP merger in 2004 and the Ryanair/Aer Lingus merger this summer. A more likely outcome is that the Commission will be even more wary than it already is to prohibit mergers.
The Commission has recently announced its intention to appeal the CFI judgment to the European Court of Justice, as it queries both the classification of the breach as "sufficiently serious" (a point on which, as article 18 of the EC Merger Regulation is clear on this issue, the Commission seems unlikely to succeed) and the causal link between the unlawful conduct and the loss Schneider suffered. After years of being on the back foot in front of the Court of First Instance on merger control cases (including not only the 2002 CFI defeats but the European Court of Justice's judgment in the Tetra Laval case in 2005 which rejected many of the Commission's complaints that the Court of First Instance had been overzealous when setting the standard of proof the Commission had to reach in merger review cases), it will be interesting to see if the ECJ will enable the Commission to win back some lost ground in this regard.
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