On 13 July 2006, the European Court of First Instance (the “CFI”) in Impala v Commission of the European Communities (Case T-464/04) annulled the Commission’s decision authorising the creation of Sony BMG. The CFI held that the Commission did not demonstrate to the requisite legal standard either the non-existence of a collective dominant position before the merger, or the absence of a risk that such a position would be created as a result of the merger. The Commission will now have to re-examine the merger transaction under the old Merger Regulation but on the basis of current market information.
The Sony BMG concentration resulted from a merger of the global recorded music activities of Bertelsmann AG and Sony. Although the Commission had reached a preliminary conclusion on 24 May 2004 that the concentration would be incompatible with Community law, it eventually authorised the merger after hearing the parties on 18 July 2004. A challenge to this decision was brought by Impala (‘Independent Music Publishers and Labels Association’), an international association whose members are 2,500 independent music production companies.
The CFI held that the Commission did not demonstrate to the requisite legal standard either the non-existence of a collective dominant position (“CDP”) before the merger, or the absence of a risk that such a position would be created as a result of the merger.
The Commission (as well as Sony, Bertelsmann, Sony BMG, and the intervening parties) have two months to decide whether or not they will appeal the CFI’s ruling before the ECJ. Meanwhile, the Commission will have to re-examine the merger transaction under the old Merger Regulation but on the basis of current market information.
According to the Commission’s decision, the absence of a CDP on the market for recorded music may be inferred from the heterogeneity of the product concerned, from the lack of transparency of the market and from the absence of retaliatory measures between the five (as there were then) largest record companies (the “majors”).
‘Transparency’ refers to the ability of companies which coordinate their conduct to monitor sufficiently whether the rules of coordination are being observed (e.g. through knowledge of each other’s commercial terms); ‘retaliatory measures’ refer to a form of deterrent mechanism to prevent deviant conduct by coordinating companies.
- Regarding transparency, the CFI held that the Commission’s theory that promotional discounts (referred to as “campaign discounts”) have the effect of reducing the transparency of the market so as to prevent the existence of a CDP, was not adequately supported and was vitiated by a manifest error of assessment.
- In relation to retaliatory measures, the Commission’s reliance on the absence of evidence that such measures had been used in the past was incorrect, since the mere existence of effective deterrent mechanisms may be sufficient to indicate the existence of a CDP.
In addition, the Commission’s conclusion that there was no likelihood of a creation of a CDP was also criticised. According to the CFI, the Commission’s analysis on this point was superficial and incorrect.
Having found sufficient grounds on which to annul the decision in relation to the existence/creation of a CDP in the market for recorded music, the Commission did not examine the wholesale market for online music licences or the sphere of music publishing, two areas upon which Impala had also based their challenge.
The case is of interest because the CFI was generally highly critical of the Commission’s analysis and use of evidence, including its reliance on key data and analyses provided by the parties to the merger without further independent analysis and verification. Further, the case shows that the high standard of proof that the Commission needs to satisfy before it prohibits a proposed concentration may also apply in relation to clearance decisions. The CFI ruling will concern the Commission, which had made various changes in an attempt to improve its economic analysis following three annulments of its decisions in 2002 (in Airtours, Schneider and Tetra Laval).
(Source): Decision of the CFI: