Conglomerate Merger Control After Tetra Laval Sven B. Völcker sven.voelcker@wilmerhale

1. Conglomerate Merger Control After Tetra Laval Sven B. Völcker sven.voelcker@wilmerhale.com 29 April 2005

2. Overview • Facts in Tetra Laval • Elements of a successful leveraging case • Standard of proof/judicial review • Illegality as disincentive to leveraging • Commitments to address leveraging concerns

3. Carton Glass HDPE PET SBM Fill Other Milk Juice Water CSD The Facts

4. Leveraging: The chains of cause and effect Dominant position in market A Leveraging conduct likely Incentives Disincentives Exit or marginalization of rivals in market B Lasting nature of exit or marginalization „... the chains of cause and effect are dimly discernible, uncertain, and difficult to establish.” ECJ, para. 44

5. Standard of proof and judicial review Full review Partial review ECJ CFI COM Law Facts Standard of proof Economic Assessment

6. Standard of proof and judicial review ECJ: Not clear – „plausibilty“ of envisaged economic development (44) AG: „Transaction must „very probably“ lead to dominance. (74). No „double symmetrical obligation“(75-81) COM: Standard of proof amounts to presumption of legality. Inconsistent with „double symmetrical obligation“ ECJ Dominance „In all likelihood“ (153) CFI COM: Will-will likely-could create a dominant position? COM Law Facts Standard of proof Economic Assessment

7. Standard of proof and judicial review ECJ: CFI right to require „close examination“ of relevant circumstances (40). Quality of evidence particularly important in leveraging cases (44). COM: „Departure from Kali+Salz standard of „cogent and consistent evidence“ ECJ AG: CFI should not enter into the merits of the Commission‘s complex economic assessment (89) CFI CFI: Conglomerate merger analysis calls for „particularly close“ and „precise“ examination supported by convincing evidence(155) COM Law Facts Standard of proof Economic Assessment

8. Conclusions on standard of proof • Standard of proof in merger cases remains an elusive issue • But a mere „possibility“ is clearly not enough in a leveraging case • CFI will remain principal arbiter of factual issues in merger cases • Full review of Commission‘s findings of fact • Self-restraint with regard to economic assessment

9. Illegality as defense in leveraging cases • All leveraging practices predicted by Commission (tying, predatory pricing, loyalty rebates) implied Art. 82 infringements • CFI: Commission must consider • Illegality of the conduct in question • Likelihood of detection • Action taken by Commission and NCAs • Financial penalties

10. Illegality as defense in leveraging cases • Commission criticism of CFI position • Incompatible with structural nature of Merger Regulation • Incompatible with presumption of innocence • Difficult to implement in practice • AG: Commission‘s criticism unpersuasive

11. Illegality as defense in leveraging cases ECJ rejects CFI position. Or maybe not? • Since the view is taken in the contested decision that adoption of the conduct [...] is an essential step in leveraging, the CFI was right to hold that the likelihood of its adoption must be examined comprehensively, that is to say, taking account [...] both of the incentives to adopt such conduct and the factors liable to reduce, or even eliminate, those incentives, including the possibility that the conduct is unlawful. • However, it would run counter to the Regulation‘s purpose of prevention to require the Commission [...] to examine, for each proposed merger, the extent to which the incentives to adopt anti-competitive conduct would be reduced, or even eliminated, as a result of the unlawfulness of the conduct in question, the likelihood of its detection, the action taken by the competent authorities, both at Community and national level, and the financial penalties that would ensue.

12. Illegality as defense in leveraging cases • An assessment such as that required by the CFI would make it necessary to carry out an exhaustive and detailed examination of the rules of the various legal orders which might be applicable and of the enforcement policy practised therein. Moreover, if it is to be relevant, such an assessment calls for a high probability of the occurrence of the acts envisaged as capable of giving rise to objections on the ground that they are part of anticompetitive conduct. • It follows that, at the stage of assessing a proposed merger, an assessment intended to establish whether an infringement of Article 82 EC is likely and to ascertain that it will be penalised under several legal orders would be too speculative and would not allow the Commission to base its assessment on all of the relevant facts with a view to establishing whether they support an economic scenario in which a development such as leveraging to occur.“

13. Commitments to address leveraging concerns • Tetra Laval‘s commitments to the Commission: • Hold-separate of Sidel for 10 years • No joint offers of Tetra Pak carton products and Sidel SBM machines • Re-affirmation of Tetra Pak II commitments: no predatory or discriminatory prices or discounts not justified by an objective justification • Rejected by Commission without market testing because behavioral in nature • CFI/AG/ECJ: Commitments would have substantially reduced scope for leveraging, and Commission did not assess whether they would have been effective

14. Conclusions on commitments to address leveraging concerns • Gencor does not bar commitments in leveraging cases • Gencor holds that behavioral commitments are not objectionable per se • Gencor holds that mere promises not to abuse a dominant position created by the merger are not acceptable commitments. • But leveraging is at best the abuse of a dominant position existing pre merger. • Merger control v. Regulation 1/2003 • Role of monitoring trustee

15. Overall conclusions • Bar to successful intervention on the basis of „leveraging“ concerns remains (appropriately) high • Role of potential illegality of leveraging behavior uncertain • Role of behavioral commitments in leveraging cases will depend on future Commission policy

16. For further reading • Sven Völcker/Pablo Charro, Tetra Laval – A landmark judgment on EC merger control, Competition Law Insight, 8 March 2005 • Bo Vesterdorf, Standard of proof in merger cases: reflections in the light of recent case law of the Community Courts, 1 European Competition Law Journal (2005) 3-33 • David Baily, Standard of proof in EC merger proceedings: a common law perspective, 40 Common Market Law Review (2003) 845-88 • Sven Völcker, Leveraging as a theory of economic harm in EU merger control, 40 Common Market Law Review (2003), 581-614