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Decisions in Doubt

It wasn't all that surprising when in 2002 the European Court of First Instance (CFI) reversed former Competition Commissioner Mario Monti's decision to block Schneider Electric's $9.2 billion bid to acquire Legrand, a competing French manufacturer of electrical equipment. After all, it was but one of three decisions by Monti that the CFI reversed that year.

But when the CFI in July 2007 ordered the European Commission (EC) to pay damages of $545 million to Schneider for not allowing the company to respond to the commission's objections to the merger review, it was a stunner: the first time the court had awarded damages to a firm for losses incurred from the commission's prohibition of a merger.

The ruling caught many observers by surprise and left them wondering whether it portended a sea change in the breadth of the commission's liability for its decisions.

"I and many others who keep abreast of developments at the court had always believed that Schneider's complaint would be rejected," says Andreas Weitbrecht, co-chair of Latham & Watkins' global antitrust and competition practice.

Most everyone agreed, however, that the ruling's precise impact could not be measured until the CFI ruled on a similar claim brought by MyTravel Group. When the ruling finally came in September, the facts were analogous and the court's reasoning no different from Schneider--but the result, a dismissal of MyTravel's claim, and the message, were very different.

"MyTravel answers a resounding 'no' to the question of whether the commission automatically has to pay up when it gets a merger decision wrong," says Hans Gilliams, a partner at Eubelius in Brussels.

Blocked Transaction

In 1999, the EU blocked the $1.2 billion bid by MyTravel, a British tour operator previously known as Airtours, for First Choice Holidays. Three years later, the CFI overturned the prohibition.

MyTravel abandoned the acquisition, much as Schneider had effectively done by disposing of the target's assets after the EC's adverse decision on its merger. But in 2003, the company launched a $440 million damage claim against the EC. The claim, like Schneider's, fell under the EC Treaty's Article 288, which requires the commission to "make good any damage caused by its institutions or by its servants in the performance of their duties."

While MyTravel was pending, the CFI decided Schneider. In awarding damages, the court ruled that the commission's liability flowed when the breach of EU law was "sufficiently serious" to have "manifestly and gravely disregarded the limits on its discretion."

And in Schneider, the breach met this standard. When the EC failed to detail in its statement of objections to the Schneider merger the specific theory of harm on which it relied, it effectively denied Schneider its fundamental right to respond to the commission's merger objections.

While the court indicated that it would forgive almost everything--except grave and manifest errors--in the commission's substantive analysis because of the need for speed in making merger decisions, the error here was a matter of mandatory procedure, and not of discretion.

"The dividing line seems to be that in situations where the commission has discretion, it is quite difficult for it to exceed that discretion so grossly as to trigger its liability," Weitbrecht says. "But where the commission has no discretion in applying procedural rules, the standard is more easily met."

The distinction was to prove fatal to MyTravel's claim.

Human Error

MyTravel based its claim on two allegations. The first was that the commission had erred in its assessment of the transaction's substantive effect on competition, more specifically whether it gave rise to a position of collective dominance in the relevant market. The second attacked the commission's treatment of the commitments offered by MyTravel to remedy its anti-competitive concerns.

Using the same standard for determining liability that it did in Schneider, the court decided that the facts of this case did not merit damages, even though it had overturned the EC's ruling prohibiting the merger.

"MyTravel recognizes that human error is a fact of life, and so you can have two types of mistakes: those within the bounds of the commission's discretion that are nonetheless sufficient to justify annulment; and those that are so far outside the normal bounds of that discretion that they give rise to damages," says Jean-Fran?ois Bellis, a competition partner at Van Bael & Bellis in Brussels.

In concluding that the commission should not face damages for all erroneous decisions, the court noted that the regulators frequently had to assess complex situations while working under very strict time constraints. Indeed, the court went so far as to say that in these circumstances the commission's margin of discretion was broad enough to permit practices that varied and decisions that were not rigorously consistent across individual cases.

"The message from MyTravel is that when the commission does a good job but just gets it wrong, it will not be liable in damages," Gilliams says.

Contrary to some of the expectations that flowed from Schneider, then, MyTravel can be seen as an affirmation that the CFI intends to protect the integrity of the European merger control system, which--as the court pointed out--is in the general interest of the EU.

Apples vs. Apples

Critics of MyTravel, however, say that the commission's errors were not sufficiently different from the errors in Schneider to justify what they say are disjointed results. But other observers say the problem is with the law, rather than with the court.

"The law demands, in effect, that a party must prove that a legal tort or wrong, not just an error, has occurred in order to recover damages," Gilliams says.

The upshot, Gilliams maintains, is that merger parties don't have any protection when they're negotiating with the commission.

"If the commission gets it wrong, it will probably take a year and a half to have the prohibition reversed in court, and I never met a client willing to keep the transaction alive that long unless there was a reasonable possibility of compensation for the commission's error," he says.

What Gilliams suggests is a no-fault compensation scheme where the EC has made an error that doesn't attract damages.

"That's not necessarily the best outcome, but it may be the only solution for companies that must invest enormous amounts in setting up mergers," he says.

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Julius Melnitzer

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