A Project of the American Enterprise Institute and the Federalist Society

European Union overturns approval of a merger between the music units of Sony and BMG

Federalist Society

July 18, 2006

On Thursday, July 13, 2006, the European Union's Court of First Instance (the EU's second-highest court) overturned the European Commission's approval of the merger between the music units of Sony and BMG. The Sony BMG venture has been operating since August 2004, when the transaction cleared regulatory hurdles in both Europe and the U.S. Addressing a complaint by a group of independent music companies, the Court ruled that the EC regulators failed to show that there was no monopoly position before the deal or as a result of it.

This is the first time that an EC decision to clear a merger has been overturned by the courts. While not necessarily the death knell for the deal, the parties must now resubmit their applications for regulatory approval.

The decision highlights an important difference between the merger review process in Europe and the U.S. In the U.S., the decision by FTC or DOJ to challenge a merger is considered an exercise of prosecutorial discretion. A decision not to challenge a merger is just that -- a decision not to act, unreviewable by any court. Third parties - like the independent music companies in the Sony BMG case - retain the right to file a private lawsuit, but bear the costs as well as the burden of proof to establish that the challenged transaction is anticompetitive.

In contrast, European law requires an affirmative decision by the regulators to "clear" a transaction. EC officials cannot simply refrain from action when they are convinced that there is no need, or that their resources are better spent elsewhere. Any decision, whether to act or not, must be legally justified. As a result, interested third parties can complain to regulators -- as they often do in the U.S. -- but also can ask the courts to determine if the regulators' decision had adequate basis.

Perhaps these distinctions reflect the difference between the U.S. mindset of "policing antitrust," and the European mindset of "regulating competition." In the global economy, such differences can lead to far-reaching consequences.

Montgomery Kosma, Associate, Jones Day

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