EU Cartel Analysis: Inability to pay

[The European Commission may “in exceptional cases...take account of a company’s inability to pay in a specific social and economic context provided that the fine would irretrievably jeopardise the economic viability of the undertaking concerned and cause its assets to lose all their value.” - point 35 of DG Comp’s 2006 Fining Guidelines]

Since those 2006 guidelines were released, the commission has been clear about how it judges inability to pay requests from companies faced with stiff cartel fines. While the details are myriad, the point, the commission says, is this: its analysis attempts to glean the company’s financial stability now and in the immediate future. The Commission’s investigation is dynamic, DG Comp says, while looking for consistency in the company’s financial projections and possible restructuring plans. When DG Comp officials have said they want extensive evidence that a cartel fine will risk putting a company out of business, they’ve meant it.

The commission’s deep examination of the financials of inability-to-pay applicants has resulted in piles of rejected requests – particularly during the height of the last wave of poverty pleas, in 2009 and 2010. In those years, 39 companies involved in seven separate cartels asked the commission for poverty discounts, according to GCR’s data. Of those companies, only 11 were given breaks from their fine because of their precarious financial state – five in the bathroom fittings cartel; three in pre-stressing steel; and one each in animal feed phosphates, calcium carbide and magnesium, and heat stabilisers. DG Comp rejected all of the inability-to-pay requests from companies involved in the liquid crystal display cartel.

Inability to pay requests per year

Many of the poverty pleas lodged with DG Comp during those years made specific mention of the economic crisis befalling the world – but particularly Europe – at the time. Some of these were sector-specific; many of the 13 companies or subsidiaries that pleaded poverty to the commission during the pre-stressing steel investigation claimed that the financial crisis had gutted the construction industry, including a rapid drop in demand for the steel and an inability to access financing. Yet even with those economic pressures bearing down on the industry, the commission rejected all but three of the requests. The commission’s bar for slashing fines due to dire financial straits is indeed high.

Inability to pay requests per cartel

But DG Comp’s decision to accept even some of the inability-to-pay requests in those years signalled a shift in the commission"s thinking; before the heat stabilisers case, the commission had never accepted such a request from a cartel participant. In the eyes of DG Comp officials, deterrence is critical when addressing cartel behaviour – not just for the targeted company, but also for observers who may be considering similar behaviour. If the enforcer began slashing penalties every time a company claimed it couldn’t pay, officials feared such pleas would become a normal course of business for lawyers defending clients in cartel investigations.

Plus, there was a larger philosophical issue with handing out poverty discounts. They would, in the Commission’s mind, reward companies who were the least prepared to go out and actively compete in the market. Antitrust decisions are not intended to protect competitors; shielding struggling firms from fines they earned through their nefarious acts would do just that.

So what changed? Essentially, the financial crisis amplified the reasons DG Comp would grant a poverty plea under the 2006 guidelines. This was particularly true for the “specific social and economic context” condition in the guidelines. Around the world, access to credit dried up, harming not only the companies accused of cartel behaviour, but their customers and suppliers as well. Entire industries slowed to a crawl – the construction industry being a prime example. This came into play in the bathroom fittings and pre-stressing steel cases.

Around the continent, the crisis also led companies to cut jobs in a bid to save money. “The current economic crisis with high unemployment rates in many countries renders the existence of a specific social context more likely,” Commission officials Philip Kienapfel and Geert Wils wrote in a 2010 paper. The commission hesitated to levy fines high enough to harm companies’ ability to stay in business and risk even more job losses in Europe and elsewhere.

As one might expect, as the financial crisis has eased, the number of inability-to-pay requests has dropped back to pre-recession levels. However the Commission, at least in limited numbers, remains willing to grant such requests so long as they are backed with hard data indicating a full fine would put the company out of business. Since 2012, five companies have asked the commission for discounts because of their financial situations – one each in the shrimps, power cables and steel abrasives cartels, and two in the paper envelopes cases – and the commission has granted two of those requests. But these accepted pleas came from envelope companies – perhaps speaking more to the struggles of those in the paper products industry than DG Comp’s new-found generosity when handing out discounts from cartel fines.

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