The European Commission's arguments supporting the Sony/BMG merger in 2004 were not of "the requisite legal standard" and were marred by "a manifest error of assessment" according to Europe's second highest court.
In overturning the commission's decision to allow the two record labels to merge, the Court of First Instance has dealt a severe blow to the commission in its role as Europe's competition regulator. It is the latest in a long line of overturned decisions, though the first in which an approval was overturned; other cases involved blocked mergers which were then approved.
In 2002, the commission blocked three mergers which were subsequently approved by the Court, prompting a major review of the commission's merger review processes. The Sony/BMG decision was the first taken entirely under the guidance of the new rules, and this latest overruling will undermine that new approach.
"This is a disappointing result for the commission, particularly given the radical changes it has implemented since the series of defeats in 2002," said Christina Day, a competition law specialist with Pinsent Masons, the law firm behind OUT-LAW.COM.
This week, the Court upheld a case brought by independent music label association Impala to have the approval annulled. "This is a watershed in European affairs, a landmark judgement for music," Impala president Patrick Zelnick said. "There is no doubt that it will block any further mergers and will transform how music and other creative sectors are treated."
Previous overrulings have involved mergers that were blocked by the commission. Many observers assumed that approvals of rulings were less likely to be challenged. Some commentators have said that former competition commissioner Mario Monti, who made the original decision just as he was leaving office, was keen to approve the merger to avoid controversy.
The ruling itself carried scathing criticism of the incomplete nature of the commission's basis for its judgment. "The elements on which that argument was founded were incomplete and did not include all the relevant data that ought to have been taken into account by the commission," it said. "They were therefore not capable of supporting the conclusions drawn from them."
The commission now has the right to appeal, but only on points of law and not on the case as a whole. The body has two months in which to lodge its appeal with the European Court of Justice.
The case may also have implications for a proposed merger between two of the other four major labels, Warner Music and EMI. Both companies are keen on the merger but cannot agree on price. The Court's ruling makes a regulatory hurdle more likely even if the companies can come to a financial agreement.
Following the annulment of its first decision, the commission will have to conduct another investigation into the merger.
"Given that the Court's judgment heavily criticises the commission's inadequate analysis and assessment of the merger, it is likely that the commission will be even more wary when reconsidering this case, thus prolonging the parties' uncertainty further," said Day.
In a message to staff, Sony BMG chief executive Rolf Schmidt-Holtz said: "While we are not pleased with having to incur the cost and inconvenience of a reconsideration process, we are confident this re-examination will confirm the commission's original findings."
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