There is a long pause on the other end of the line. "So let me get this straight," my American colleague says. "We are scheduled to close next week. And you're saying we have to do a merger filing . . . in Europe?"

"I am afraid so," I answer. I've had this conversation before with other clients and can see where this is going. With the myriad of other considerations to get the deal done, no one had thought to check with EU counsel, until now.

I proceed to explain that it does not matter that the merger is between two U.S. companies; the European sales are enough to establish jurisdiction. I confirm that the European authorities could well have significant concerns beyond those of their U.S. counterparts. I emphasize that, in a best-case scenario, closing will likely need to be delayed for months, not days.

Another long pause before my U.S. colleague speaks up. "I've never been to Brussels, but I have the feeling that may soon change."

"It's a nice city," I say. "A lot of charm, interesting architecture, good restaurants." All of which is true, although I appreciate that this will be of little consolation. Clients rarely come to Brussels for the creme brulee.

Such conversations, while not uncommon a decade ago, are less frequent these days, as U.S. companies increasingly recognize that adhering to the European competition laws is simply a cost of doing business in Europe. No doubt high-profile EU reviews of U.S. mergers like Boeing/McDonnell Douglas and, more recently, GE/Honeywell have had much to do with this awareness, as have enormous fines imposed by the European Commission (the Commission) on U.S. companies such as Microsoft for alleged anticompetitive conduct. Still, American companies are often surprised by how the EU competition rules work in practice, how different the approach is in Europe to that in the United States, and how severe the consequences of running afoul of the EU rules can be.

This article provides an overview of some of the key things one should know about EU competition law, highlighting, where relevant, some notable differences in the EU and U.S. approaches.

No Painless Merger Filings in Europe

Whether a merger needs to be filed at the EU level or to one or more national authorities in Europe, the notification process is considerably more intensive than the preparation of a U.S. Hart-Scott-Rodino filing. European merger filings invariably require the parties to provide a thorough analysis of the relevant antitrust markets, detailed sales and market share figures of the parties and their competitors, and often contact details of key suppliers, customers, and competitors. In more complex cases, EU filings can easily exceed 100 pages, excluding annexes.

European merger approvals are often the number one obstacle preventing merging companies from proceeding with closing. Companies should assume that it will take several months from first contact with European counsel until all approval decisions are obtained, even in the most straightforward of cases. Where there is an active complainant against the merger, this period can become much longer, even where the complainant is a competitor. The Commission realizes that competitors may have an ulterior motive to complain. However, it takes time for the Commission to sort out the legitimate concerns (if any) from the bogus claims, especially in markets where the Commission has limited previous experience. In several cases, competitors have been successful in forcing a prolonged investigation or otherwise creating mischief with what are ultimately revealed to be meritless arguments. Until the day that such vexatious claims are penalized, competitors will continue to have a significant influence on European merger reviews.

Some Merger Theories Not Accepted in the U.S. Are Accepted in Europe

As in the United States, the European competition authorities are primarily concerned about "horizontal" mergers, i.e., those that result in the parties having a high combined market share. Both the U.S. and EU authorities also will consider the "vertical" effects of a merger, e.g., whether the acquisition of a key supplier will foreclose competitors to essential supplies, although such concerns seem to be given more weight in Europe.

Unlike the U.S. authorities, the Commission also has shown a willingness to entertain arguments of negative effects arising from the merged entity's broad product portfolio, even in the absence of an overlap in the parties' activities. For example, in GE/Honeywell, the Commission found that the combination of GE's and Honeywell's complementary strengths would have allowed the merged company to leverage its position in engines to enhance its position in avionics. Although the Commission's decision was affirmed on appeal, the particular argument of "conglomerate" effects was rejected as being too speculative. Still, the court did not deny that, with sufficient evidence, a merger could be blocked on conglomerate grounds. Such an argument is much less likely to be taken seriously by U.S. enforcers.

Finally, U.S. lawyers are often surprised when EU counsel recommends downplaying the efficiencies that will result from a merger. In the United States, it is often wise to highlight such efficiencies as likely to lead to consumer benefits. In the EU, on the other hand, efficiencies, until recently, were seen less as a defense to a merger than an offense, the Commission's reasoning being that efficiencies serve to reinforce a merged entity's dominant position. While the Commission's official view has recently changed, it remains a challenging task to convince the Commission to view efficiencies positively. For starters, one must be able to quantify expected efficiencies and show that they are likely to benefit consumers, which is much easier said than done.

Dominant Companies Are Held to a Much Higher Standard

Article 82 of the EC Treaty polices the conduct of the "dominant" firm, i.e., a company having a "position of economic strength" such that it can "behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers," thus hindering "effective competition."

One might think, based on this definition, that only very few companies would be considered to have a dominant position. However, as the determination of whether a company is dominant is based largely on its market share in the relevant product and geographic market, a company may quite unexpectedly find itself in a dominant position in a narrowly defined market. The Commission, in past cases, has found companies to be dominant in the market for their own-brand spare parts, for narrow categories of products for which they are the only supplier, and in geographic markets defined as "national" or even "local."

What's more, EU law provides for a presumption of dominance where a company holds a market share of 50 percent or more, and dominance has been found at market shares around 40 percent. Under U.S. law, by contrast, such market shares would likely be considered too low to give rise to a monopoly. A situation of joint or collective dominance also may be found when two or more companies together account for a large part of the market. Simply put, it is not as difficult as one might imagine to be found to have a dominant position.

Moreover, while U.S. law encourages monopolists to compete aggressively on the merits, even if this may harm less-efficient competitors, the EU approach is less permissive, and certain conduct that would otherwise be permissible, or even considered pro-competitive, may be considered illegal when engaged in by a dominant company. The dominant company in Europe is therefore left in the awkward position of having to ease off the accelerator, even when its competitors are all going full throttle.

For example, under EU law, while a nondominant firm in most cases can deal with whomever it wishes, a dominant firm does not have this luxury and cannot, for instance, cut off supplies to an existing customer without having an objective justification. The fact that the customer is a competitor of the dominant firm is not considered an objective justification and is likely to be considered an aggravating factor.

Loyalty rebates are another example of a practice that may constitute an abuse when implemented by a dominant firm. This was evident in the British Airways case, where BA's scheme of offering rebates to travel agencies was found by the Commission to cause foreclosure and therefore violate Article 82, even though BA's market share declined during the period of the alleged infringement. (In contrast, similar claims raised by Virgin Atlantic against BA in the United States were dismissed on summary judgment.) Clients often struggle to see why giving discounts or otherwise lowering prices is often seen as anticompetitive in Europe, when such conduct is permitted under U.S. law.

Whatever the Conversion Rate, a €500 Million Fine Is a Lot of Money

Cartel enforcement is a top priority for European enforcers, and fines are high and getting higher. Many of the highest fines ever imposed by the Commission were in 2006, and this trend has continued in the early part of 2007. In January of this year, Siemens was fined nearly €397 million for its role in the gas insulated switchgear cartel, the largest fine ever imposed on a company for a single infringement. A month later, ThyssenKrupp was fined nearly €480 million for multiple infringements in the elevator and escalator sector, eclipsing the previous record of €462 million levied on Hoffmann-La Roche in 2001 for its role in the vitamins cartels. The total fine imposed on all participants in the elevator and escalator cartels, €992 million, is also a record.

Substantial fines are not limited to cartel participants. The highest single-firm fine ever imposed by the Commission is €497 million on Microsoft for allegedly abusing its dominant position by failing to provide competitors information they claimed was needed in order to compete in server operating systems and for failing to offer a version of Windows without Windows Media Player. Subsequently, the Commission imposed a further fine of €280.5 million on Microsoft for allegedly failing to comply with its decision. Both Commission decisions are currently under appeal.

There is reason to believe that the level of fines will only get higher. New fining guidelines were adopted in 2006, allowing for a multiplication of the fine by the number of years the infringement occurred. This marks a significant change from previous practice, where the increase for duration was generally limited to 10 percent for every year of the infringement. For a 10-year cartel, this could mean the difference between a 100 percent increase of the starting fine (under the old rules) and a 1,000 percent increase (under the new rules). An increase of up to 100 percent also may be added for each prior infringement. The Commission also will impose an "entry fee" of up to 25 percent of the sales of any company that enters into a price-fixing, market-sharing, or output-limitation agreement. It may only be a matter of time before fines eclipse the €500 million mark.

Cartelists Seeking Leniency Should Act Quickly (or Perhaps Not at All)

It is sometimes said that a company that has engaged in cartel activity needs a sprinter, not a lawyer. Indeed, the full immunity from fines that is available to whistle-blowers creates a clear incentive for cartel members to be the first to the Commission's door to expose a conspiracy. There are, of course, other considerations a whistle-blower must bear in mind, such as other jurisdictions' leniency programs and the consequences that admitting to participation in a cartel may have on private actions for damages (although recent measures have been taken to reduce this risk). Nevertheless, the opportunity to escape a fine for cartel activity creates a strong incentive for companies to be the first to come forward.

Far less of an incentive exists with respect to companies that are not the first to provide information of cartel activity to the Commission. Such applicants are eligible for a fine reduction, but not full immunity. More specifically, the first non-whistle-blower to provide the Commission with evidence of "significant added value" is eligible for a fine reduction of 30-50 percent, the second is eligible for a 20-30 percent reduction, and any subsequent applicants are eligible for a maximum reduction of 20 percent. While such reductions are not insignificant, it is the Commission that decides whether evidence is of significant added value. This, along with the general lack of transparency involved in setting the fine prior to the reduction, makes it difficult for a potential applicant to quantify the benefit of cooperating with the Commission. This is especially true given that the Commission may have difficulty proving the existence of a cartel without the cooperation of companies other than the whistle-blower.

Private Damages Claims and Jail Time Are Now Possible in Europe

Fines remain by far the predominant deterrent against antitrust infringements in Europe. Unlike in the United States, private actions for damages are rare and incarceration of persons orchestrating cartels rarer still. It would be a mistake to completely ignore these risks, however. Indeed, there is unprecedented movement on both fronts.

Most member states' laws for some time have allowed claims for damages arising from antitrust violations, but such laws typically are not seen as plaintiff-friendly. In many European countries, the claimant's burden to prove an infringement, damage, and causation is very high, and only limited discovery may be allowed; for example, requiring the defendant only to produce documents that have been precisely identified by the claimant. This is, of course, challenging in a cartel case, where the most relevant documents, by their very nature, may be secret. Claimants generally do not have an automatic right to documents seized by competition authorities and may not even be aware of such documents.

Add to this the general unavailability of treble damages, or, in many cases, any punitive damages, and it is no surprise that private damages actions in the antitrust arena have been slow to come about in Europe, where the culture is, by all accounts, far less litigious than in the United States.

However, current EU Competition Commissioner Neelie Kroes has made "private enforcement" of competition law one of her top priorities. The Commission recently issued a consultation paper aiming to facilitate private damages claims by removing some of the most common barriers to bringing such claims in national courts. While making private claims a significant deterrent to competition law infringements in Europe is clearly a formidable challenge, we are starting to see some cracks in the ice. Germany has had a number of successful damages actions arising from antitrust infringements, and in the UK, where the discovery rules are more plaintiff-friendly, there have been several out-of-court settlements, and a representative action (similar to a U.S.-style class action) is currently pending seeking damages against companies accused of fixing prices of replica soccer apparel. Other countries such as Italy, France, Spain, and the Netherlands also have had cases, and in light of the Commission's full support, one can expect the number of private damages actions to increase, especially in situations where a formal finding by a competition authority can be used to prove the existence of an infringement.

As concerns the possibility of criminal sanctions, there is at present only a minority of member states whose laws allow for imprisonment as a punishment for committing a cartel, and in some cases this risk is little more than theoretical. However, there are member states where incarceration is a legitimate possibility.

For example, in February of 2007, an Irish court sentenced a Cork businessman to 12 months in prison and fined him €30,000 for facilitating price-fixing of Ford automobiles. Although the businessman's sentence was suspended due to his advancing age, this was not the first conviction in Ireland for violating antitrust laws.

Elsewhere, the UK Serious Fraud Office last year charged nine individuals with criminal offenses involving an alleged conspiracy to fix prices of various pharmaceuticals and penicillin-based antibiotics between 1996 and 2000. As the activities took place before the Enterprise Act 2002 came into force, no proceedings were instigated under the cartel offense created under that legislation. However, the 2002 law allows for imprisonment of individuals committing cartels, and statements from the Office of Fair Trading suggest that it will not hesitate to bring such cases.

No Attorney-Client Privilege for In-House Counsel

Internal counsel in the United States, the UK and other common law countries enjoy the same benefit of legal privilege as their external counterparts. The protection against disclosure that is afforded to the communications between these lawyers and their clients is considered integral to the company's ability to seek legal advice and the lawyer's ability to provide it. Protection of such communications allows the dialogue between company and counsel to be open and constructive, and in the end this should, in most cases, facilitate compliance with the law.

Many of the EU member states whose legal systems are based on civil law take a different approach. In these countries, in-house counsel are considered employees whose advice is no more privileged than any other correspondence among employees.

Although EU lawmakers have had numerous opportunities to rectify the situation, the present position at the EU level is that communications between companies and their internal counsel are not privileged in the context of Commission investigations. This applies not only to European in-house counsel but to all in-house counsel. In other words, if an internal lawyer in Chicago e-mails advice to the head of sales of the company's German subsidiary, this advice could be subject to seizure by the Commission and used as evidence to establish an infringement of the competition rules. Until legal privilege is extended to communications between in-house counsel and their clients, companies with a physical presence in Europe should be wary.

Conclusion

Despite ever-increasing transatlantic cooperation and convergence in the area of competition law, there remain some significant differences between the approaches of the U.S. and European authorities.

A merger that sails through U.S. review can get bogged down in Europe based on theories that were never considered by the U.S. Justice Department or FTC. A company with market power may find itself in hot water for offering discounts to its European customers, even if all its competitors do the same. Advice from in-house counsel analyzing a proposed agreement under the competition rules is subject to being seized by European authorities and used as evidence to prove an infringement.

In sum, companies cannot assume that the answers to key questions of competition law will necessarily be the same on both sides of the Atlantic. More than ever, such an assumption could prove to be an expensive mistake.