In a blow to the European Commission (the Commission), the European Court of First Instance has decided that Schneider Electric SA (Schneider) must be partially compensated for the Commission’s subsequently annulled prohibition of the proposed merger between Schneider and Legrand SA (Legrand). The Commission’s grave and manifest failure to have regard to Schneider’s right of defense in the merger proceedings was a sufficiently serious breach of Community law to confer such a right.
It is the first time that the Commission has been ordered to pay damages in connection with a merger case, an outcome that can only strengthen the importance attached to the rights of defense in EU administrative proceedings.
This case has also wider implications, beyond the scope of merger and other antitrust cases.
In its decision, the Court acknowledges the Commission’s margin of discretion in the area of antitrust. However, it emphasizes that it is not a discretion without limits and sheds light on where those limits lie.
The case will not necessarily open the floodgates of easy access to damages against the Commission. However, it is likely to make the Commission more vigilant in respecting procedural rights of private parties, particularly in the context of merger control proceedings. Indeed, in this case, the Commission was faced with an action for damages for a staggering EUR 1.6 billion (subject to various proposed adjustments). While the Court did not award damages to this extent, the burden of facing such a large claim serves as a stark reminder of the high risks involved in failing to fully respect merger control procedures. It now remains for the parties to consider whether to appeal to the European Court of Justice.
The long-running Schneider-Legrand saga has been a continuous thorn in the Commission’s side for many years. To recap on the background, Schneider and Legrand are two large French manufacturers of electrical equipment. Way back in February 2001, they notified the Commission of Schneider’s proposed takeover of Legrand. In October 2001, after Schneider’s acquisition, the Commission declared the merger incompatible with the common market, among other things, on the basis that it significantly impeded effective competition in certain French markets. The Commission subsequently ordered Schneider to divest Legrand. Schneider challenged these decisions before the European Court of First Instance. Anticipating that it might not be successful, Schneider prepared its divestiture of Legrand.
On 22 October 2002, the European Court of First Instance annulled the Commission’s decisions. First, it found the Commission’s economic analysis flawed. Secondly, it found that the Commission had infringed Schneider’s rights of defense due to the discrepancy between the Commission’s statement of objections and the Commission’s decision.
The statement of objections allows a company to propose solutions to the problems identified and to make its defense known before the Commission adopts its final decision. However, in its final decision, the Commission advanced for the first time an objection to the merger which alleged “buttressing” of Schneider’s dominant position in the electrical panel-board components sector and Legrand’s leading position in the downstream electrical equipment segments. Schneider was therefore unable to defend itself against this allegation and propose appropriate corrective measures before the Commission’s final decision.
After the Court annulled the Commission decisions, the Commission resumed the merger control procedure. On December 13, 2002, the procedure was closed after Schneider abandoned the merger, in light of the Commission’s persisting concerns, and executed the divestiture contract. Action for damages Schneider brought an action for damages for a staggering EUR 1.6 billion, subject to various proposed adjustments, for loss it allegedly suffered as a result of the Commission’s conduct.
The Court considered that for the Community to incur non-contractual liability there must be unlawful conduct on the part of the Community’s institutions, namely a grave and manifest disregard of the limits of their powers of assessment. Therefore, the Commission is not liable merely because it gets a merger decision wrong, but only where it has engaged in conduct qualifying as a grave and manifest disregard of the limits of its powers of assessment.
The Court did not examine non-contractual liability in purely legal terms. Instead, it explored the purpose of defining the threshold at which the Community may incur non-contractual liability. On the one hand, the Court recognized the need to protect the latitude and discretion which, in the public interest, the Community competition regulator must enjoy, both in its policy decisions, and in its appraisal and application of relevant provisions of Community law. This should be weighed against the need to ensure that the cost of flagrant and inexcusable failings of the Commission does not fall on third parties. The Court’s willingness to take into account policy considerations continues to afford the Commission a wide margin of discretion in its merger review tasks.
However, the Court placed considerable weight on the right to be heard. In particular, it considered that the Commission’s late argument of reciprocal “buttressing” deprived Schneider of any possibility of knowing that there was no prospect of obtaining an EU clearance, unless it submitted corrective measures to address the Commission’s objection.
The Court found no justification or explanation for the infringement of Schneider’s rights of defense, despite the particular constraints to which the Commission services were in fact subject. The Court therefore, again, showed a willingness to have regard to the circumstances in which an infringement takes place, although to no avail for the Commission.
The Court concluded that there was an obligation to compensate for the harmful consequences of the Commission’s conduct and afforded Schneider a right to compensation: first, for its expenses incurred in the resumed merger control procedure; secondly, for the reduction in the divestiture price that Schneider had to concede in order to postpone the execution of that divestiture. In a surprising twist, the Court reduced the latter to two-thirds, as it considered that Schneider had contributed to its own loss by assuming the real risk that the merger would subsequently be declared incompatible. The exact amounts will have to be determined in the coming months.
This is not the Court’s last word on the subject. A somewhat similar case, still pending before the Court of First Instance, was brought against the Commission by MyTravel (formerly Airtours). It relates to the Commission’s prohibition of the Airtours/First Choice merger in 1999, which was annulled in 2002 by the Court of First Instance. MyTravel claims compensation for loss comprising lost profits, lost synergy cost savings and the costs of Airtours’ abortive bid for First Choice.