United States: GE/Honeywell Appeal: The Commission Wins a Battle, but Did It Lose the War?

On December 14, 2005 the Court of First Instance ("CFI") finally rendered its judgments on the appeals against the European Commission’s 2001 decision prohibiting the proposed merger between Honeywell International and General Electric Company ("GE"). There is no possibility of resurrecting the original transaction, and the appeal was brought as a matter of principle. Although the CFI has affirmed the Commission’s decision, this may well be a pyrrhic victory. On the controversial issues – vertical and conglomerate effects including bundling – the CFI held that the Commission had not sufficiently proved its case. The CFI saved the Commission’s face by affirming on the narrow grounds that, based purely on an analysis of horizontal overlaps, the Commission had correctly found that the merger would increase GE’s already existing dominant position in the markets for jet engines for large regional aircraft, engines for corporate aircraft, and small marine gas turbines.

The judgment is a reaffirmation of the CFI’s insistence on careful and detailed review of the Commission’s assessment of economic data, especially in cases involving a prospective analysis of potential developments on markets following a concentration. On the basis of this detailed review, the CFI endorsed the Commission’s analysis of the factors supporting the conclusion that GE held a dominant position on the market for large commercial jet aircraft engines. These included its analysis of market share, of the reinforcing effect of GE’s vertical integration, and of the state of competition on the market.

However, the CFI rejected the Commission’s finding that, by acquiring Honeywell’s engine starter product line, GE would strengthen its position on the engine market by delaying or disrupting access of competing engine manufacturers to the starter engines. Following and amplifying the approach taken in its judgment in Tetra Laval, the CFI held that the Commission had failed to take into account the deterrent effect of Article 82 EC – obstructing supply of engine starters to competing engine manufacturers would probably be an illegal abuse of GE’s dominant position on the engine market.

As regards conglomerate effects, the CFI first rejected, as based on insufficient proof, the Commission’s findings that GE would be able to exploit the strength of its financial services subsidiaries GE Capital and GECAS to create a dominant position for certain Honeywell avionics and non-avionics product lines. Similarly, it rejected the Commission’s finding that through tying, technical bundling and mixed bundling (offering a package of products at a reduced price) GE would increase its dominant position in large commercial jet aircraft engines and create a dominant position in avionics and non-avionics products. Essentially the CFI held that the Commission’s analysis was speculative and insufficiently proven, and relied on economic theories that are the subject of controversy among economists.

In one sense, the GE/Honeywell judgment can be seen as a prolongation of the series of stinging defeats dealt the Commission by the CFI in 2002 in the Airtours,¹ Schneider² and Tetra Laval³ judgments. However, events have moved on, and the Commission has already embarked on a remedial program. This includes the institution of the internal devil’s advocate panel to provide a fresh pair of eyes in difficult cases, the notable absence of reliance on conglomerate effects in more recent decisions, and the declared intention to issue new guidelines on the treatment of conglomerate effects in merger decisions, to supplement the 2004 guidelines on horizontal mergers.

In short, the GE judgment merely confirms that, while the doctrine of conglomerate effects in merger decisions is not entirely dead, it can be invoked only in exceptional cases based on specific and detailed economic analysis.

Footnotes

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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