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The CFI's judgment of 25 October 2002 in Tetra Laval v. Commission [1] is the third in a series of cases in which Commission decisions under the Merger Regulation prohibiting transactions have been overturned. The previous judgments were Airtours [2] and Schneider/Legrand. [3]

Tetra Laval is of particular interest for the following reasons:

• It involves a so-called "conglomerate" merger -- i.e., one in which there are no issues of horizontal overlap between the combining enterprises or of vertical effects -- and it examines issues relating to "leveraging" -- i.e., the use of market power on one market on which dominance already exists in order to achieve market power in another market. Conglomerate issues have, in the recent past, been one of the most contentious issues in the application of the Merger Regulation (equaled only by the issue of collective dominance treated in Airtours). They were involved in the very controversial GE/Honeywell case, itself currently on appeal. The related issue of "leveraging" has likewise been the subject of considerable controversy and debate, to which Tetra Laval makes an important contribution (see discussion below).
• It throws some new light on the question of the required degree of immediacy and probability that a dominant position will be created in the future. The formula used is that the Commission must find that a dominant position would "in all likelihood" be created or strengthened "in the relatively near future". The Commission's decision had been taken in 2001, forecasting the attainment of dominance on a new market in 2005. In such circumstances, the CFI observed, the Commission's analysis must be "particularly plausible", suggesting that the difficulty of showing the requisite degree of probability increases with the span of time required to reach dominance -- four years is not too long, apparently, but the burden in the case of such a long period is particularly high.
• It holds that the Commission cannot base a prohibition on a finding that the combined entity will achieve dominance in a new market through conduct which is illegal (because it infringes Article 82), unless it also shows that the threat of enforcement of the law will not be sufficient to prevent such conduct.
• In subjecting the Commission's findings to extremely rigorous and detailed analysis, it applies a standard of appellate review which is arguably different from, and more demanding than, that previously applied in merger cases, and competition law cases in general. The judgment recognizes that the Commission has a measure of discretion in Merger Regulation cases, as in all cases involving complex issues of economic fact, and it applies the familiar "manifest error of assessment" standard corresponding to that discretion. But, following Airtours, it also refers to the need for "convincing evidence" and proof "to the requisite legal standard", and the way this formula is applied concretely suggests that the Commission may be reversed in its findings, in the case of not only clear contradictions or ignoring of evidence, but, apparently, also lesser insufficiencies.
• The relentless detail in which the CFI scrutinizes and rejects the Commission's analysis undoubtedly means that, like Schneider/Legrand, Tetra Laval represents a major and humiliating criticism. One concrete result may be to discourage the Commission from a certain tendency to try to support prohibition findings by as broad a range of arguments as possible, and encourage it to focus on fewer but stronger grounds.

The issue of leveraging

The judgment confirms that, as a matter of principle, conglomerate effects can meet the test required by the Merger Regulation for prohibiting a concentration -- "a concentration which creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the Common Market or in a substantial part of it". That is, it is legally possible that "leveraging" can occur with the result that dominance in one market is achieved through the use of market power in another market. But, the CFI found, the Commission committed "manifest errors" of evaluation and failed to establish that the dominant position would be created by proof meeting "the requisite legal standard".

The confirmation that leveraging can occur in a manner which justifies a prohibition under the Merger Regulation, and by implication, which can constitute an abuse of a dominant position prohibited by Article 82, is of general importance. Leveraging issues were invoked by the Commission in the GE/Honeywell case, now on appeal, and are involved in the Commission's ongoing proceedings against Microsoft. Such issues are likely to be of continuing importance in the future for EU competition policy. Officials of the US Department of Justice have, in a series of well-publicised statements and comments targeted at the Commission, sought to call in question the very basis for leveraging theory in general. The CFI's holding provides support for the possible application of such theory, subject to proving the facts.

However, cases which use "leveraging" theories can involve many very different fact patterns. The facts in GE/Honeywell, in Tetra Laval, and in the current Microsoft investigation are all completely different. Beyond the general issues of principle described above, the result in any one of the cases has little relevance to the outcome of any of the others. What is clear is that the burden of proof, whatever the exact theory and fact pattern, is high.

Analysis of the judgment

The Commission found that Tetra was dominant on the markets for aseptic carton packaging machines and for aseptic cartons; in this, it repeated the finding in the earlier Article 82 proceeding against TetraPak (as it then was) which condemned TetraPak [4] for tying and predatory pricing conduct on the markets for aseptic machines and cartons and for non-aseptic machines and cartons. Now, the Commission identified two other neighbouring markets where the concentration would have relevant effects. The first was the market for packaging equipment for PET (polyethylene terephthalate, used for making transparent plastic bottles, which may, where required by the characteristics of the product to be packaged, be rendered opaque by "barrier technology" so as to exclude light and oxygen), and in particular SBM (stretch blow moulding) machines, but also filling machines. The second was the market for packaging equipment for HDPE (high density polyethylene bottles, which are opaque), including EBM (extrusion blow moulding) machines and filling machines. The Commission found that there was a degree of substitutability between carton and PET packaging, but not sufficient to make them a single market (although it noted that they might converge into a single market in the future).

In a nutshell, the Commission found that the test of the Merger Regulation was met for the following reasons:

• The transaction would strengthen Tetra's already existing dominant position in the aseptic carton packaging market because it would eliminate the competitive constraint from Sidel as a leading player in the PET market.
• It would lead to the creation of a dominant position for the combined entity in the market for PET packaging. This would occur principally because of the possibility created for leveraging from Tetra's position on the aseptic carton packaging market to the PET packaging market on which Sidel already held a "leading" position.
• The combined entity's future dominant positions in carton and PET, together with its "notable" position on the market for HDPE equipment, would "[be] likely to reinforce its position in both markets, raise barriers to entry, minimize the importance of existing competitors and lead to a monopolistic structure of the whole market for aseptic and non-aseptic packaging of 'sensitive' products [defined as liquid dairy products, juices, fruit-flavoured still drinks, and tea/coffee drinks] in the EEA."
• The Commission sought to buttress these arguments, especially the first two, by further arguments that the transaction would have relevant (i) horizontal effects by strengthening (but not to the point of dominance) the combined entity's position on the markets for low-capacity SBM machines, barrier technology, and aseptic PET filling machines, and (ii) vertical foreclosure effects on "converters" (companies which provide PET bottles and filling machines).

Most of the judgment deals with Tetra's challenge to the correctness of these findings. Claims by Tetra that it had been denied access to certain items in the Commission's file were rejected.

Horizontal and vertical effects

The CFI found that the Commission had "taken [horizontal and vertical effects] into account" even though it had not squarely based the decision on them. The CFI began its substantive analysis by rejecting the Commission's analysis of these effects.

As regards horizontal effects, it noted that Tetra had committed to divest its low-capacity SBM business, and that the effects on aseptic PET filling machine and barrier technology markets were not significant. Thus, the horizontal effects were "merely minimal, if not almost non-existent". Similarly, as regards vertical effects, the CFI found the Commission had not shown that these would be significant. Consequently, the Commission had committed "manifest errors of assessment" in relying on horizontal and vertical effects to support its decision.

Lack of foreseeable conglomerate effect

Treatment of this issue constitutes the heart of the judgment. The CFI lays out a number of framework considerations, and then engages in a lengthy and very detailed examination of the Commission's decision, line by line and sentence by sentence, overturning every one of its principal conclusions.

Considerations relating to conglomerate mergers

The CFI begins by observing that conglomerate mergers (those not producing horizontal or vertical effects) may be prohibited only if they meet the test of the Merger Regulation (creation or strengthening of a dominant position significantly impeding effective competition). It then examines the "temporal" aspect. Tetra argued that unless the creation or strengthening of a dominant position occurred immediately following consummation of the transaction, the test of the Merger Regulation was not met. The CFI rejected this view:

"[I]n a case where the markets in question are neighbouring markets and one of the parties to a merger transaction already holds a dominant position on one of the markets, the means and capacities brought together by the transaction may immediately create conditions allowing the merged entity to leverage its way so as to acquire, in the relatively near future, a dominant position on the other market. This could especially be the case where the relevant markets are tending to converge and where, in addition to the dominant position held by one of the parties to the transaction on a market, the other party, or one of the other parties, to the transaction holds a leading position on another market.

Any other interpretation of Article 2(3) of the Regulation could deprive the Commission of the power to exercise control over merger transactions which have solely or principally a conglomerate effect.

Consequently, in a prospective analysis of the effects of a conglomerate-type merger transaction, if the Commission is able to conclude that a dominant position would, in all likelihood, be created or strengthened in the relatively near future and would lead to effective competition on the market being significantly impeded, it must prohibit it [citations]." [5]

The CFI then discussed the nature of conglomerate effects. It first distinguished the case in which a conglomerate merger immediately changes the conditions of competition on the second market to the extent of creating or strengthening a dominant position from

"a situation where the creation or strengthening of a dominant position on the second market does not immediately result from the merger, but will occur . . . only after a certain time and will result from conduct engaged in by the merged entity on the first market where it already holds a dominant position. In this latter case, it is not the structure resulting from the merger transaction itself which creates or strengthens a dominant position within the meaning of Article 2(3) of the Regulation, but rather the future conduct in question." [6]

Such a finding could only be made if based on "a precise examination, supported by convincing evidence, of the circumstances which allegedly produce those effects". [7] In this case, the Commission found that the leveraging from the carton to the PET equipment market would take the form of practices such as tying, predatory pricing, price wars, loyalty rebates, refusal to supply equipment or after-sales service. Since Tetra held a dominant position on the market for carton packaging and equipment, such conduct would infringe Article 82. The CFI found that the possibility of such conduct could not be excluded, but the Commission had to evaluate

"the extent to which . . . incentives [to engage in anti-competitive conduct] would be reduced, or even eliminated, owing to the illegality of the conduct in question, the likelihood of its detection, action taken by the competent authorities, both at Community and national level, and the financial penalties which could ensue." [8]

The CFI found that the Commission had not made such an evaluation, nor had it taken into account the commitment offered by Tetra not to engage in anti-competitive conduct. Consequently, the portion of the Commission's findings premised on the probability of such anti-competitive conduct failed, and the finding of leveraging must be examined to see whether it was based on remaining "sufficiently convincing evidence". Moreover,

"since the anticipated dominant position would only emerge after a certain lapse of time, by 2005 according to the Commission, its analysis of the future position must, whilst allowing for a certain margin of discretion, be particularly plausible." [9]

The specific analysis of the facts relating to the Commission's leveraging finding

The CFI proceeded to examine whether this burden had been carried by the Commission. It first rejected a frontal attack by Tetra on the very theory of leveraging when applied to markets for products which are "weak substitutes" rather than "complementary". Tetra cited a number of Merger Regulation decisions, including GE/Honeywell, as examples of leveraging involving complementary products. The CFI replied that this case involved a different fact pattern, and the possibility of leveraging in it was "based on mostly objective and well-established evidence" relating to the structure and relationship of the carton and PET packaging markets, and the likely growth of the PET market which was necessary to create an incentive for leveraging [10]. The CFI specifically agreed that the combined entity would have a "first-mover advantage" in supplying existing carton customers when they switched to PET for packaging a given product [11].

However, the CFI then turned to an exhaustive examination of the exact degree of foreseeable growth in the PET market, examining the conclusions of various expert reports relied on by the Commission. It found that "the growth forecasts for LDPs and juices as stated by the Commission . . . have not been proven to the requisite legal standard", but even so, given that there would be some growth, the incentive to leverage could not be excluded.

Turning to the foreseeable potential for leveraging, the CFI noted that, excluding conduct which infringes Article 82 and conduct which Tetra committed not to engage in, "the merged entity's possible means of leveraging would be quite limited". [12] The CFI proceeded to examine those means for each possible target market, holding that

"the contested decision does not provide sufficiently convincing evidence to show that leveraging from the aseptic carton market would enable a dominant position to be created for the new entity by 2005 on the markets for barrier technology, aseptic and non-aseptic filling machines, plastic bottle closure systems and auxiliary equipment." [13]

However, the Commission's main leveraging finding concerned the market for SBM machines. It first analysed and rejected as not supported by "sufficient evidence" the Commission's finding that SBM machines should be divided into sub-markets on the basis of end-use (i.e. the type of liquid to be packaged). However, it found that it was appropriate to distinguish between the markets for low- and high-capacity SBM machines.

As regards low-capacity machines, the CFI faulted the Commission for failing to give correct emphasis to the fact that Sidel's market share was less than 40% and this would not be increased by the transaction because Tetra committed to divest its Dynaplast subsidiary, which is active on this segment (the CFI suggests that at times the decision seems to forget about this divestiture); for failing to take into account the recent arrival on the market of two new competitors; for claiming the market was saturated when there was evidence of substantial potential growth, especially for "non-sensitive" products like beer and water; and for similarly failing to recognise potential growth in use of low-capacity SBM machines for sensitive products. Consequently the decision did not provide "sufficiently convincing evidence" that the merged entity would be able to marginalize its competitors in this segment, and the Commission thus committed a "manifest error of assessment" in this respect [14].

As regards high-capacity machines, Sidel had capacity three times the size of its three main customers, and almost two-thirds of all market capacity; nevertheless, the Commission had accepted that it was not dominant (presumably on the basis of its share of sales). The CFI launched into a detailed examination of whether there was sufficient evidence that the merged entity would be able to achieve dominance by leveraging in this segment. It noted that the merged entity would be in a position to make bundled offers of a range of aseptic filling equipment for PET. However, the Commission had not adequately assessed a number of factors which lessen the importance of this advantage. In particular, it had not considered the relation between HDPE and PET, and the likelihood that packagers of dairy products would switch to HDPE rather than PET; had not shown "to the requisite legal standard" why the merged entity would have a "first mover" advantage over other producers when juice customers switched from glass to PET, given that several other suppliers were present on both markets; had not shown how, in the case of FFDs, the merged entity's "first mover" advantage would be significant in light of the limited anticipated growth of PET in this sector; had failed to take into account the effect of Tetra's commitment not to offer carton products bundled with PET equipment; had erroneously found that there were no other competitors who could offer both carton and PET packaging equipment in the face of evidence that there were such competitors; had generally failed to correctly evaluate the extent of competition from the other main competitors; had failed to take into account the very substantial growth potential for packaging beer in PET, as to which leveraging would be impossible since beer cannot be packaged in cartons; and had failed to provide sufficient evidence that converters would be marginalised as a result of leveraging [15].

In short, the whole of the Commission's findings on leveraging were vitiated by "a manifest error of assessment" [16].

The strengthening of Tetra's position on the carton packaging market

The CFI now turned to the Commission's finding that the proposed transaction would strengthen Tetra's existing dominant position on the market for carton packaging by eliminating the competitive constraint from Sidel as a leading player in the neighbouring market for PET. Again, it systematically examined and rejected the Commission's arguments. The Commission had overestimated the potential for growth in the PET market, with the result that

"It is . . . not possible, on the basis of the evidence relied on in the contested decision, to determine, with the certainty required to justify the prohibition of a merger, whether the implementation of the modified merger would place Tetra in a situation where it could be more independent than in the past in relation to its competitors on the aseptic carton markets." [17]

The Commission had found that the merged entity would have an incentive not to reduce its prices, and would stop innovating; these findings "have, on any view, not been established to the requisite legal standard". [18] As regards price, in view of the fact that carton has a price advantage of 30-40% over PET, the CFI found that the Commission had not shown why Tetra without Sidel would have an incentive to lower carton packaging prices, while the combined entity would not; it had not shown why, if the combined entity raised prices, its carton packaging competitors would not seize the opportunity to take sales away from it; in the case of non-price-sensitive customers who would switch to PET regardless of the cost differential with carton, the Commission had not shown why the merger would have any effect on their behaviour. As regards innovation, the Commission had not shown why customers wishing to stay with carton would not continue to drive innovation in carton packaging, especially since there were still competitors in the carton market despite Tetra's high market share, whose capabilities the Commission had not analyzed correctly.

In short, the Commission's finding concerning reinforcement of Tetra's dominant position on the carton market was not established "to the requisite legal standard". [19]

The general strengthening of the merged entity's market positions

The Commission's third ground, that the transaction would lead to a "general strengthening effect" of the merged entity's various market positions, was rejected without detailed analysis, simply referring to the CFI's analysis of the Commission's findings on its first two grounds.