Schneider: Damages against the European Commission

30 October 2007

Louise Banér

The European Court of First Instance’s (“CFI”) judgment to award damages to Schneider Electric (a French manufacturer of electrical equipment) for its losses resulting from the European Commission’s prohibition of its merger with Legrand SA (also a French manufacturer of electrical equipment) signifies an important turning point in EC law. This is the first time that the Commission has been required to pay damages under Article 288 of the EC Treaty for serious errors made during a procedure under the Merger Regulation.

In October 2001 the European Commission prohibited Schneider’s completed acquisition of Legrand SA. This was followed in January 2002, by the Commission ordering Schneider to part with all but 5% of the acquired share capital that it had obtained in Legrand SA in July 2001. Schneider successfully challenged both of these decisions and on the 22nd October 2002 the Court of First Instance annulled the Commission's prohibition on the basis that the Commission’s economic analysis and methodology was flawed and it had committed procedural errors. In particular the CFI held that the Commission had failed to have regard to Schneider’s rights of defence by introducing in its final decision a new objection to the merger which had not been raised previously. Following the CFI decision, the Commission resumed its re-analysis of the merger, but on the basis that the Commission continued to express persistent doubts, Schneider decided to proceed with the divestment of Legrand in December 2002.

Schneider subsequently brought an action against the Commission for damages. Article 288(2) of the EC Treaty provides that “in the case of non-contractual liability, the Community shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by its institutions or by its servants in the performance of their duties”. Schneider claimed damages of approximately €1.6 billion (subject to a reduction pending the outcome of the taxation of costs) plus interest of 4% plus an amount covering the tax which they would be liable to pay on an award of any such damages. Schneider argued that the sum covered compensation for the losses that it incurred as a result of the Commission’s poor management of the merger investigation (in particular, relating to its divestment of Legrand SA at a loss and to legal and other expenses throughout the proceedings). It claimed that the Commission made several grave and manifest errors in assessing the legality of the merger and by failing to have regard to their rights they committed a serious breach of Community law.

On 11 July 2007, the CFI held that the Commission must compensate Schneider for some of the losses that it incurred as a result of the Commission's prohibition of its acquisition of Legrand SA and for breaching Community law. The Court concluded that the infringement of Schneider’s right to be heard deprived Schneider of the opportunity to submit remedies to reduce or eliminate the concerns that had only been raised in the final decision and not previously.

The CFI did not however permit compensation to be paid for the full difference between Schneider's initial purchase price for shares in Legrand SA and the sale price it achieved on divestiture. However it did conclude that the Commission was liable to pay two-thirds of the losses suffered by Schneider as a result of it having to agree a lower sale price to postpone the sale until the CFI judgment. Schneider had contributed to its own loss by assuming the risk that the merger would be subsequently declared incompatible, which finding would result in the inevitable sale of its shareholding in Legrand. The Court also held that Schneider had a right to compensation for the expenses incurred in participating in the resumed merger control procedure undertaken by the Commission following the CFI’s October 2002 judgment.

The judgment shows that procedural errors can be considered to be sufficiently serious breaches of law to result in a successful damages claim. However the CFI did not find that the Commission’s errors of substantive assessment, which were strongly criticised in the 2002 decision, were enough to give rise to liability for damages. The Court pointed out that it was in the public interest to preserve the latitude and discretion which the Commission has in policy decisions and appraisal and in the application of relevant provisions of EC law.

On 6 August 2007, the Commission announced an appeal against the CFI's judgment to the European Court of Justice.

Source: Case T-351/03 Schneider Electric v Commission, 11 July 2007 available at: www.curia.europa.eu