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Two years ago Mario Monti, who heads the Directorate-General for Competition of the European Commission, was the world’s most feared antitrust cop. He was dubbed Super Mario, and his agency’s Merger Task Force was called worse. Together they nixed several notable deals, culminating in the summer of 2001, when the task force squashed the proposed merger between the General Electric Co. and Honeywell International Inc. Now Monti is on the defensive, and his chief opponents are no longer the companies he once threatened. In the video game world, Super Mario’s archrival is known as Wario, and Monti’s new nemesis, Europe’s Court of First Instance, could just as easily be called the Wario Court. In a series of major decisions last year, the CFI sharply reprimanded Monti’s Merger Task Force and reversed three of its rulings. Never before had the commission been overruled after it blocked a merger. Brussels is still reeling. Two of the court’s rulings have sparked innovative damages suits against the European Commission; the commission is appealing the third. Though the legacy of the CFI won’t be determined until that appeal is resolved, it has already inspired a regulatory revolution in European competition law. “The extent of the reforms reflects the seismic shift in the balance of power between the commission and the court in the field of merger control,” says Sven Voelcker, a partner in the Brussels office of Wilmer, Cutler & Pickering. “The reality of judicial control has hit home.” Meanwhile, even though the GE-Honeywell deal has long been dead, the fate of Monti’s GE decision is uncertain. That ruling was appealed to the CFI, and the betting in Brussels is that GE will win. But if the chief aim of GE’s appeal is to make Monti rethink his approach to merger review, a victory now would be academic. In December 2002 — partially in response to its rebuke by the CFI — the European Commission adopted a merger control reform package, revamping its own procedures and proposing basic changes to the regulation that governs merger review. Monti is tangibly addressing the very concerns that lawyers for GE aired two years ago: a casual approach to economics, a cavalier attitude toward evidence, and, above all, a disregard for the rights of the defense. Jack Welch must be smiling. The CFI hears appeals directly from the regulatory rulings of the European Commission. On issues of law, CFI rulings may be appealed to the European Court of Justice. Sitting in Luxembourg, the CFI and the ECJ are each composed of one judge from every European Union state. Each court usually sits in panels of three judges; one of them, known as the “reporting judge,” is assigned to summarize the facts and arguments on both sides. The CFI’s trio of decisions have by now become the stuff of competition law legend. In June 2002, it annulled the commission’s ruling on the merger between English tourist agencies Airtours PLC and First Choice Holidays PLC. The commission had killed the deal on the grounds that the companies were “collectively dominant.” The CFI set out a new, more-rigorous test for collective dominance and pointed to what it called “a series of errors” by the commission. Most embarrassing, the commission had relied on an undated one-page excerpt from an advertising study to conclude that the market for budget travel was stagnant, when the court said it was “apparent from a cursory examination” that the opposite was true. The next blow came in the Schneider-Legrand case. On Oct. 22, 2002, the CFI annulled the commission ruling that held the merger between French electronic component manufacturers Schneider Electric SA and Legrand SA to be unlawful. In this case, the commission’s errors were mainly procedural. It had effectively pulled a bait-and-switch — relying on different arguments in its ruling than in its initial statement of objections. Three days later, on Oct. 25, the CFI completed its trifecta by annulling the commission ruling on the merger between Sidel SA, which manufactures plastic bottles, and Tetra Laval SA, which makes foil-lined cardboard packs. Like GE-Honeywell, this combination was initially barred because of imagined “conglomerate effects.” The theory — out of favor in America — holds that a conglomerate can stifle competition even in a market it does not dominate, for instance, by bundling two related products. The CFI held that such effects will not doom a merger unless it’s shown that competition is apt to be eliminated in the near future by clearly identified anti-competitive practices. The CFI’s message was loud and clear: The commission got it wrong three times. It’s hard to play Kremlinologist with the European courts, because they are required to issue unanimous opinions to the outside world, even if they are bitterly divided internally. But two CFI judges seem to have played an especially influential role in the trio of merger rulings. Nicholas Forwood, who is British, served on all three panels. Bo Vesterdorf, who is Danish, appeared on both the Schneider and Tetra panels and served as the reporting judge in Tetra. He joined the court upon its creation in 1989 and became court president in 1998. “Vesterdorf has become the Greenspan of Europe,” says Wilmer’s Voelcker. “You try to read into every word [of his opinions].” Though Vesterdorf is a career Eurocrat, he is widely perceived as smart and strong-willed. The CFI has the reputation among cognoscenti of being more independent than the ECJ. While Airtours, Schneider, and Tetra were arguably the highest-profile rulings in the CFI’s history, research by Wilmer, Cutler shows that the CFI has annulled about 20 nonmerger competition law rulings since it was founded. Given its similarities with Tetra, many expect GE-Honeywell to suffer the same fate. Not only did the two prosecutions rely on the same economic doctrine of conglomerate effects, but both were managed by regulator Enrique Gonzalez-Diaz, notorious among defense lawyers for his aggressive tactics. Most intriguing, the reporting judge in the GE-Honeywell case is the omnipresent Forwood. Under court procedures, his assignment could either have been made randomly or been specifically directed by Vesterdorf. The consensus in the private bar is that the CFI has shifted the balance of power in Europe between the judiciary and the executive on issues of merger control. Tilman Lueder, a spokesperson for the Directorate-General for Competition, takes issue with this interpretation. He argues that the commission has always endured judicial scrutiny; Airtours broke new ground because merger review is a relatively new EU function, dating to 1990. “I don’t think that the balance of power has shifted,” says Lueder. “Antitrust regulators win some and lose some in all countries. This is the normal interaction between an administrative authority and judicial review.” Perhaps. But no one disputes that the CFI has spurred change at the commission. A few weeks after the Schneider and Tetra double-whammy, Monti addressed a gathering of lawyers from the International Bar Association. “With more hindsight,” he said, “we will say that these judgments, no matter how painful, came at the right moment. Indeed, there are lessons to be drawn.” Monti has taken flak mainly because he is a convenient symbol, and his name is catchier than that of the institution he leads. It can be argued that he inherited a host of problems when he took over as EU competition commissioner from Karel von Miert in September 1999, and he responded to them nimbly. “Mario is an economist, and he always planned to introduce economic thinking,” says Lueder. “The court’s merger rulings only underscored the urgency of reform.” The first changes were seen in practice within weeks of the Airtours decision. Prior to that ruling, the commission had signaled, in its statement of objections, that it wanted to block the cruise line merger between the Carnival Corp. and P&O Princess PLC Cruises. But shortly after Airtours, the commission acceded to a request by the parties and took the unprecedented step of convening a second panel to review the case. Monti backed the finding of the second panel, and the cruise line merger was cleared in 2002. After the Airtours blow was followed by Tetra and Schneider, the commission under Monti codified this change of policy — and others. Under the new policies, a high-level devil’s advocate panel will take a second look at any merger that might be blocked, and parties have increased rights of defense and greater access to their case team and file. The Merger Task Force — perceived by private lawyers as the most aggressive part of the Directorate-General for Competition — has been downsized slightly, with some staff transferred to units that specialize by commercial sector, rather than regulatory task. A new emphasis on economics is discernible in the reorganization. A respected English economist, Philip Lowe, has been appointed director-general, reporting to Monti; and since Sept. 1, Lars-Hendrik Röller, formerly a professor at the University of Berlin, has occupied the newly created position of chief economist. Overall, the corps of antitrust economists is expected to expand from about 12 to 20. It remains to be seen how the substantive rules on merger review will change, but the commission has sent informal signals that economics will drive policy. These changes have been widely praised as steps in the right direction. But they have created unpopular new paper burdens for merging parties. “Airtours, Schneider, and Tetra Laval have led to reforms which are very welcome,” says partner Antoine Winckler of Cleary, Gottlieb, Steen & Hamilton in Brussels, “but the informational burden has risen, inevitably.” The private bar’s biggest fear is that European merger review will become as slow and expensive as American merger review. A recent study by the International Bar Association, the American Bar Association, and PricewaterhouseCoopers found that an in-depth review of the average American deal costs about double an in-depth European review ($5 million versus $2.5 million). At the same time, attorneys fret that, in certain respects, the reforms haven’t gone far enough. William Kolasky of Wilmer, Cutler, who headed international antitrust for the U.S. Department of Justice, warns that a chief economist can’t do much without a staff of adequate size. “The DOJ and the FTC each have 50 economists,” he says, “and couldn’t work without them.” Moreover, the basic design flaw of European merger review remains. A merger’s fate is decided by the very same officials who prosecute the case. What will happen is more litigation. All three of the CFI decisions have spawned sequels. Most crucial, the commission has appealed the Tetra ruling to the European Court of Justice on legal grounds. At stake is not the fate of any merger, but the balance of power between the institutions. Meanwhile, Airtours (now called MyTravel Group PLC) has filed a CFI suit for damages against the commission. And Schneider has announced it plans to do the same. Its claim is more complex and demands a more detailed understanding of the situation. As a result of a quirk in French law, Schneider had already bought Legrand, for 5.4 billion euros, by the time the commission first declared the deal unlawful. After the CFI found this ruling procedurally flawed and remanded in October 2002, there was still a chance that the merger could proceed. But the commission pressed ahead with a new investigation of the merger and ordered Schneider to dispose of Legrand whole, rather than in parts. Schneider argues that this inflexibility forced it to sell the company at the low price of 3.6 billion euros at the end of 2002, to a group led by Kohlberg Kravis Roberts & Co. In February 2003, Schneider filed a CFI challenge to the commission’s disposal order; it soon plans to file a claim against the EU for reimbursement of the roughly 1.8 billion euro difference between Legrand’s purchase price and sale price. The Airtours and Schneider damages suits are unprecedented in the area of EU competition law. To prevail, a party must prove that the commission “manifestly and gravely disregarded the limits on its discretion.” In this difficult quest, MyTravel and Schneider are represented by Malcolm Nicholson of London’s Slaughter and May and by Cleary’s Winckler, respectively. Each lawyer argues that if the commission’s goofs were bad enough to meet the manifest error of assessment standard for annulment by the CFI, then they’re also bad enough to meet the damages standard. But others are skeptical. “You can’t win damages from an agency just because it has made a crass mistake born of carelessness,” says Stephen Kinsella, a Herbert Smith Brussels antitrust partner who was not involved in either case. “If you could, the system couldn’t function.” Before the courts reined it in, the Merger Task Force used as its unofficial logo the image of a sheriff’s badge. At the center of the badge swam an open-mouthed piranha, presumably on the prowl to devour merger deals. After public complaints, the European Commission took the image down from its Web site, but it had already fixed itself in the public imagination. The past 15 months have shown that, even under the current system of merger control, courts can provide a meaningful check on the commission’s power. But that progress is precarious. It could be undone in a stroke if the commission prevails in its appeal of the CFI’s Tetra ruling to the ECJ — and restores a system of weak judicial review. “If the commission wins in Tetra,” says Winckler, “then you have a real disaster.” The main legacy of the three CFI decisions would be an increased paper burden. There would again be no check on the commission. No Wario to stop Mario. Michael D. Goldhaber is chief European correspondent for The American Lawyer. This article first appeared in the September supplement Focus Europe.

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