Air fair

The Court of First Instance has overturned the European Commission's rebuttal of the Airtours-First Choice merger. Simon Taylor reports on the implications of the decision

The judgment of the Court of First Instance (CFI) in Airtours • Commission was handed down on 6 June 2002. The ruling catalogues a series of errors of fact and analysis in the European Commission's (EC) decision blocking the proposed 1999 merger between Airtours (now My Travel) and First Choice. The CFI concluded that the EC did not prove its case to the requisite standard and that the decision must be annulled.
Competition Commissioner Mario Monti, who signed the Airtours decision five days after coming into office, notes that the judgment illustrates vividly the fact that the EC is subject to judicial review. But his words hide the fact that the CFI's judgment is a harsh rebuke by the CFI of the EC's use of its considerable powers. In the Wild West of EC merger control, the sheriff has been too keen to fill the county jail and the judge has had to step in to ensure a fair trial.
So what does the case tell us about the law and its enforcement through merger control procedures?
Firstly, it provides some guidance on the legal definition of collective dominance. The three-pronged test cited by the CFI, which clarifies but does not differ substantially from the EC's current practice, is reviewed below.
More importantly, the Airtours judgment hints at the dangers of the EC's role as investigator, prosecutor, judge and jury and highlights the standard of evidential proof that is expected of the EC. The EC's errors, some of which are set out below, indicate a failure to subject the assessment of the facts to the full rigours of logic and an overeagerness to find the case proven.

Collective dominance
The EC Merger Regulation requires the EC to assess whether a merger would create or strengthen a dominant position, resulting in a significant impediment of competition in the common market (or a substantial part of it). If it would, and the parties have not offered commitments to address the competition concerns raised, then the merger must be prohibited.
The rules have been interpreted by the EC and the courts as applying to the creation or strengthening of a dominant position, not only between the parties, but also between the parties and one or more third parties.
In Airtours, the merger would have resulted in three UK shorthaul package tour operators having a combined market share of around 80 per cent. The EC felt that the big three remaining operators would have every incentive to stop competing and instead adopt parallel conduct, with the result that capacity would be tightened and prices increased.
The CFI in Airtours did not dispute that the Merger Regulation applied to the creation or strengthening of collective dominance, but stated that three conditions are necessary for a finding of collective dominance: first, there must be sufficient market transparency for all members of the dominant oligopoly to be aware of the way in which the others' market conduct is evolving; second, for collective dominance to be viable, there must be adequate deterrents to ensure that there is a long-term incentive in not departing from the common policy; and third, the EC must establish that the foreseeable reaction of current and future competitors, as well as of consumers, would not jeopardise the results expected from the common policy.

The verdict
The CFI noted that it must take into account the discretionary margin that the EC enjoys in applying the Merger Regulation, but found that the EC's analysis had a number of shortcomings, which included the following:
•The EC failed to assess adequately the degree of competition prior to the merger and did not prove that the merger would result in a change in the level of competition in the market.
•The EC did not establish that there had been sufficient changes in the market to invalidate the conclusions reached two years earlier in 1997 by the Monopolies and Mergers Commission (MMC), that the market was competitive. It also concluded that cautious capacity planning and vertical integration evidenced a tendency to collective dominance.
•The EC concluded that the market was characterised by low growth, had underestimated the degree of demand volatility and failed to prove that the market was transparent.
•The CFI identified a number of reasons why it would be difficult to retaliate against “cheats”, and found that the EC had erred in finding that there were sufficient incentives to prevent an operator from departing from the common course of conduct.
•Finally, the EC underestimated the ability of smaller tour operators or new market entrants to take advantage of conditions of undersupply on the market, and the ability of consumers to switch to other types of holiday.
It concluded that the EC's decision was “vitiated by a series of errors of assessment as to factors fundamental to any assessment of whether a collective dominant position might be created”.
The CFI's scrutiny of the evidence in Airtours will help ensure that merger prohibition decisions, or at least those based on collective dominance, are not taken lightly in the future. This may provide some comfort to companies considering mergers in sectors prone to allegations of oligopolistic dominance, such as mobile telephony, brewing, transport, steel and auditing.

Effective judicial review?
The difficulty with this ruling is that it may have come too late for the parties. It vindicates their view that the merger should not have been blocked and they will recover at least some of their legal costs. It has brought some guidance on the legitimacy of further consolidation in the UK package tour industry. But the 1999 deal has long since been abandoned.
Hence the weakness of judicial accountability for the EC's decisions. Proposed mergers, which fall within the EC jurisdiction, are generally conditional on approval being granted by the EC. If approval is not forthcoming, the deal is generally dead.
The CFI has introduced a fast-track procedure for cases, such as merger control decisions, that do not lend themselves to the adoption of interim measures. This procedure is being used in appeals against the EC's merger prohibition decisions in Schneider-Legrand and Tetra Laval-Sidel, and should reduce the judicial timeframe from the three years taken in the Airtours case to less than one year. Provided the fast-track procedure allows the parties to present their arguments, this development should lead to more effective judicial review and could, in time, enable deals to be kept alive during the judicial process.
The EC is also currently carrying out a thorough and wide-ranging review into the merger control rules following the publication of its green paper in December 2001. Commissioner Monti has said that he has taken on board criticism of weak rights of defence, inadequate checks and balances, insufficiently expert staff and inadequate resources.
New staff and resources are being made available and this will no doubt be given impetus by the ruling in Airtours. Reform is also needed by, for example, extending the role of the hearing officer to cover substantive issues and granting the parties earlier access to the file.
However, a more radical rethink of the EC's powers is also needed. There is a conflict between its role as both investigator and judge, and this may have led in this and other cases to a lack of rigour. The introduction of a US-style requirement to obtain court approval before taking prohibition decisions is one idea that should be explored.
Simon Taylor is a senior associate in the European antitrust group of Allen & Overy