Judicial interference: redefining the role of the judiciary within the context of U.S. and E.U. merger clearance coordination.

• Author: Carson, Yasmine

ABSTRACT

In December 2003, Sony and Bertelsmann AG (BMG) sought approval from the Federal Trade Commission and European Commission to effectuate a joint venture between the two companies. Remarkably, almost two years after both antitrust authorities had cleared the Sony-BMG joint venture, the Court of First Instance annulled the European Commission's decision to approve the transaction. This groundbreaking decision by the Court of First Instance has the potential to undermine coordination efforts between antitrust authorities in the United States and the European Union, as well as to frustrate the predictability and efficiency that businesses need in merger regulation. Using the regulatory review of the Sony-BMG transaction as a starting point, this Note examines judicial review of merger clearance decisions in the United States and the European Union. The Note then suggests that judicial standards of review should recognize successful multinational coordination as a reason to defer to antitrust authority decisions and require increased transparency to facilitate such review.

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND A. The Sony-BMG Transaction B. The Law of Agency Inaction in the United States 1. Reviewability Doctrine in the United States: The FTC as an Untouchable Authority 2. The Sony-BMG Investigation at the FTC C. Reviewability Doctrine in the European Communities 1. Duty to Give Reasons 2. Reviewability 3. The Sony-BMG Investigation in the European Community i. The European Commission's Decision ii. The Decision of the Court of First Instance III. THE IMPORT OF TRANSNATIONAL COORDINATION, RATIONALE FOR DIVERGENT MODELS, AND RESULTING PROBLEMS OF DEFERENCE AND TRANSPARENCY A. Why Some Form of Judicial Review of Commission Clearance Decisions Is Necessary in the European Union 1. The U.S. and the E.U. Seek to Vindicate Related but at Times Conflicting Substantive Goals that Necessitate Judicial Review in the E.U. but not in the U.S 2. Heckler's Reasoning May Be Less Appropriate As Applied to the Commission B. Problems Undermining the Optimization of Coordination Efforts Between the E. U. and the U.S 1. The CFI Does Not Consider or Give Deference To Commission Coordination Efforts 2. The U.S. System Is not Transparent, Which May Undermine the Perceived Commitment to Coordination in the U.S. i. The Benefits of Transparency ii. The Drawbacks of Transparency IV. MOVING TOWARDS SENSIBLE AND WORKABLE COORDINATION OF COMPETITION LAW: REEVALUATING NOTIONS OF TRANSPARENCY AND STANDARDS OF JUDICIAL REVIEW A. The Feasibility of Mandating Disclosure and Crafting Standards of Review 1. Modifying Disclosure Rules and Standards of Review in the U.S. 2. Modifying Disclosure Rules and Standards of Review in the E.U. 3. Memorializing the Commitment to Coordination and Confronting Problems of Harmonization V. CONCLUSION I. INTRODUCTION

In December 2003, Sony and Bertelsmann AG (BMG) announced a proposed joint venture. (1) In what could be considered a success story in bilateral coordination, the Federal Trade Commission (FTC) and European Commission (Commission) worked closely together during their investigations and came to a uniform result: both granted clearance to Sony and Bertelsmann in July of 2004. (2) However, upon petition by Sony-BMG competitors in the European Union, the Court of First Instance (CFI) annulled the Commission decision two years after it was handed down. (3) The annulment was the first of its kind; the CFI had never annulled a Commission merger clearance decision. (4) Through the groundbreaking exercise of its annulment authority in this merger matter, the CFI struck down regulatory approval of a merger almost two years after the deal's completion, a scenario that is undesirable from the point of view of the regulated entities. (5) The events unfolding in the Sony-BMG case beg one question: is there a way to prevent judicial review in Europe from frustrating attempts at coordination between antitrust authorities across the Atlantic? If so, is there a way to reconcile the two systems to further legitimize the goal of coordination?

This Note answers both questions in the affirmative. It compares judicial review of merger clearance in the United States and Europe, using the Sony-BMG joint venture as an instructive example of how the allowance of judicial review after coordination between European and U.S. antitrust authorities has the potential to undermine such attempts at transatlantic coordination. Part II of this Note discusses the background of the Sony-BMG joint venture, the non-reviewability doctrine applicable to FTC decisions in the United States, judicial review of Commission decisions in the European Union (E.U.), and standing issues relevant to both. Part III discuses the importance of transnational coordination, explains the divergence between the European model of reviewability and the U.S. model of non-reviewability, and reveals problems of deference on the European side and transparency on the U.S. side that frustrate coordination attempts. Part IV offers a solution to move towards sensible and workable coordination of competition law in the U.S. and E.U. To give credence to these values, this Note posits that both the U.S. and European judicial standards of review should reflect the fact that successful coordination on a multinational level is itself reason to defer to antitrust authority decisions. Specifically:

(1) both the Commission and the FTC should be required to make any relevant information about coordination on a transnational level public in its decisions;

(2) the 1998 cooperative agreement currently in place between the U.S. and the E.U. should be reformulated to provide for required cooperation in merger review;

(3) the CFI's standard of review should recognize coordinative efforts as a reason to defer to Commission decisions; and

(4) U.S. federal courts reviewing private antitrust challenges to mergers should defer to FTC clearance decisions that stem from transnational reconciliations.

Many would argue that non-reviewability of FTC decisions already confers supreme deference on the FTC, making disclosure of the reasons for clearance decisions unnecessary. However, because private litigants in the U.S. have the potential of upsetting efforts at coordination by challenging FTC clearance decisions indirectly, it is necessary to require the publication of reasons for clearance decisions on the U.S. side.

2. BACKGROUND

   1. The Sony-BMG Transaction

      In December 2003, Sony, a global music recording and publishing company, and Bertelsmann AG, an international media company, proposed a joint venture between the two companies to be operated under the name "Sony BMG." (6) At that time, both Sony and Bertelsmann Music Group (BMG), a wholly owned subsidiary of Bertelsmann, were active participants in the music recording industry. The joint venture between the two companies would discover artists, develop them, and engage in the marketing and sale of recorded music. (7)

      On July 28, 2004, the FTC closed its investigation of the joint venture, allowing Sony and Bertelsmann to proceed with their plan. (8) While closing an investigation is not necessarily conclusive in today's world of retrospective enforcement actions against consummated mergers, the negative inference to be drawn from the close of the FTC's investigation is that the agency found no actionable violations of Section 7 of the Clayton Act or Section 5 of the FTC Act. (9) The FTC, which is under no obligation to explain its decision not to challenge the joint venture, declined to do so. (10)

      During its investigation, the FTC worked closely with the Commission of the European Communities, which was conducting a similar investigation of Sony-BMG with respect to the European common market. (11) This cooperation between the FTC and the Commission stemmed from a 1991 agreement to coordinate in competition law enforcement. (12) Under the agreement, U.S. and European competition authorities notify each other of cases of common interest, exchange information, cooperate on related cases, and to the extent legally possible, take account of the other's regulatory interests. (13) A subsequent 1998 agreement that currently does not apply to mergers (due to investigatory timetables) expanded this notion of comity in competition law, gave further guidelines for comity requests, and raised the presumption of bilateral cooperation. (14)

      On May 24, 2004, the Commission provisionally decided that the joint venture "would reinforce a collective dominant position on the market for recorded music" and initiated a second-phase investigation. (15) Two months later, the Commission's Antitrust Advisory Committee approved a draft opinion granting clearance of the Sony-BMG joint venture. (16) On July 19, 2004, the Commission concluded that the joint venture "does not create or strengthen a single or collective dominant position in the national markets for recorded music, licenses for online music, or distribution of online music" so as to impede competition in the common market. (17) Finding the joint venture to be compatible with the common market, the Commission, like the FTC, granted clearance. (18) Sony and Bertelsmann consummated their joint venture on August 5, 2004. (19)

      On December 3, 2004, Impala, an international association of independent music production companies, challenged the Commission's decision in the CFI. (20) After expedited proceedings, the CFI annulled the Commission's earlier decision on July 13, 2006. (21) In a "scathing judgment," (22) the CFI found that the Commission's decision was based upon "inadequate reasoning," a "manifest error of assessment," and insufficient data. (23) The Commission was ordered to reevaluate the joint venture in light of the CFI's opinion. In March of 2007, the Commission issued a Press Release stating that it had "decided to open an in-depth investigation into the merger of the...