EU Cartel Analysis: The Appeals
As part of GCR’s third EU Cartel Survey, we examined five years of court decisions stemming from appeals against European Commission cartel cases. The data implies that DG Comp sees its decisions overturned or amended before the EU's High Court more often than observers have suggested.
Words by Ron Knox || Research by Pallavi Guniganti and April French ||
After years of hearing complaints from European competition lawyers that EU courts showed perhaps unfair deference to the continent’s antitrust enforcer when hearing challenges to its decisions, GCR last September set out to examine whether there was any truth behind the perception.
The data suggested that those suspicions played out in the cases.
In the two years of cases GCR examined, covering 2012 and 2013, EU courts sided with the European Commission’s Directorate General for Competition in more than three-quarters of all appeals against DG Comp decisions. While the Commission shrugged off its high rate of success as the product of a lot of misguided and badly handled appeals, competition lawyers said the evidence was clear: European courts appeared hesitant to question DG Comp’s thinking or case preparation, even when presented with arguments suggesting the enforcer made a mistake when deciding a case or a fine.
Last year’s research looked at the full range of DG Comp cases, including very fact-specific conduct cases – abuse of dominance and the like – that courts seemed unwilling to unpack and challenge in appeals.
That perceived hesitancy from the court, however, faded away during a new round of research GCR undertook this September in the course of our 2015 update to the EU Cartel Survey – a comprehensive look at EU cartel decisions dating back to 2006. As part of our research, we examined the past five years of ECJ appeals against DG Comp cartel fines – particularly those appeals that succeeded in getting a DG Comp fine annulled or reduced. And there were quite a few.
According to GCR’s research, the EU Court of Justice has overturned commission fines, or backed General Court fine reductions, in slightly fewer than 40 per cent of all completed appeals since 2011. Those 24 successful appeals, according to the data, reduced the overall amount of DG Comp cartel fines by more than €624 million over the past five years.
That rate of reduced or overturned cartel fines outpaces the overall numbers of successful appeals against DG Comp decisions and belies the perception that European courts are content to rubberstamp the commission’s competition decisions.
“It is an indication that the judges are not going to swallow everything,” says Eric Morgan de Rivery, a partner at Jones Day who has advised several companies in appeals against DG Comp cartel fines.
According to an analysis of appeals in the EU’s High Court, the European Court of Justice, the majority of decisions to reduce DG Comp cartel fines stemmed at least in part from shortfalls in the commission evidence.
These shortfalls include a number of different evidentiary burdens the Commission must meet when calculating a company’s fine. The commission must calculate the length of the cartel’s operation, the role a company played in the conspiracy, the amount of cooperation the defendant provided to the commission during the investigation, and a host of other factors.
The court decisions show that DG Comp has at times stumbled over these evidentiary burdens: overstating the roles some companies played or their awareness of their involvement in the conspiracy; claiming the cartel at issue was a single, continuous conspiracy without offering proof; failing to calculate the fine correctly based on a range of issues; and, at times, simply lacking evidence that the conduct at issue actually took place as DG Comp described.
These mistakes have been infrequent, observers and DG Comp supporters say. Courts have reduced DG Comp fines by only 15 per cent or so, according to some calculations, and even that may overstate the court’s willingness to rein in the commission’s cartel fines, as it does not account for cases that were never appealed. Still, the courts have on occasion rebutted the Commission for the way it handled cases or statements of objection.
No single issue has been as polarising and hotly debated as that of whether parent companies should be held accountable for the actions of their subsidiaries.
In at least four cases over the past five years, the Commission has been chastised by the courts for attaching unnecessary or unsubstantiated fines to parent companies who had claimed they had no knowledge or control of their subsidiary’s actions.
One case gained significant attention among practitioners and pundits: Elf Aquitaine’s appeal against a commission fine holding it liable for the role of its majority-owned subsidiary, Arkema, in a chemical cartel case. In 2005 the Commission hit both companies with a €45 million fine, and the parent turned to the courts, arguing that the Commission failed to respond to evidence and arguments Elf Aquitaine put forward during the investigation demonstrating its lack of control over Arkema’s actions.
The General Court upheld the fines, but in September 2011 the Court of Justice overturned the Lower Court and the Commission, on the grounds that DG Comp had glossed over the evidence Elf Aquitaine presented or declined to address it at all in the charging papers. While the parent still bears the burden of defeating the presumption of control, the court ruled, DG Comp had an obligation under the EU charter to take Elf Aquitaine’s evidence into account when deciding its fine, and to lay out an adequate explanation as to why it had rejected this evidence and found the company liable for the cartel. DG Comp’s charging papers lacked such explanations, so the Court of Justice annulled the fine against Elf Aquitaine. Arkema remained on the hook for its fines – both for the cartel and for recidivism.
Practitioners praised the decision. Martin Bechtold at Allen & Overy told GCR at the time that the Commission had, up until that point, brushed aside arguments from parent companies that subsidiaries had acted on their own, often without any explanation as to why they were considered irrelevant. “The court has now clearly established that this is not possible, and that an automatism under which the parent company can be held liable does not exist,” he said then.
Since the Elf Aquitaine decision, practitioners say the courts have continued to generally rule in the Commission’s favour and are still hesitant to take DG Comp to task over its decisions. But in several cases, judges have continued to chip away at the Commission’s past tendencies to take opaque decisions that at times appeared to level unfair punishments against parent companies involved in cartel cases because of the actions of their subsidiaries.
In December 2013, for example, the Court of Justice again struck down a fine against a parent company entangled in its subsidiary’s cartel case, backing the General Court’s decision to annul a €58 million fine against Italian chemical company Edison, the parent company of cartel participant Ausimont. The courts held that DG Comp had failed to explain adequately why it rejected evidence presented by Edison, suggesting that Ausimont was out of its control during the cartel period.
The Tomkins case is another example. In early 2013, the Court of Justice rejected DG Comp’s application to overturn the General Court’s reduction of a fine against US-based Tomkins and a subsidiary, Pegler. The Lower Court had decided that DG Comp miscalculated the duration of Pegler’s involvement in a copper fitting cartel, and that the fine against it and Tomkins should be slashed. DG Comp appealed that ruling, but also said that regardless of whether Pegler’s fine was reduced, Tomkins should be made to pay the full amount because of its control of the company.
The ECJ rejected that request. The High Court found that the Commission must treat the parent company and its subsidiary at least equally and not fine the parent more. Other appeals further guided DG Comp toward fairer tactics when dealing with parental liability issues, and observers say the Commission has thoroughly improved its statements of objections and meeting its evidentiary burden generally.
“I think that the change that I have seen is that they are much more careful in motivating their decisions,” Morgan de Rivery says. The court has, through fine reductions and annulments, instructed the Commission to add more detail to their decisions, and the Commission has by and large complied.
Indeed, DG Comp has added extensive detail to statements of objections, observers say, and, in cases where the parental liability presumption applies, it allows and takes account of arguments opposing liability for parent companies. And aside from somewhat ancillary issues, the courts have generally sided with DG Comp’s assessment of parental liability in cartel cases.
However, Morgan de Rivery and other observers say the improved process at DG Comp after its courtroom losses has not cured all ills surrounding presumptions of parental liability.
Bo Vesterdorf, the Herbert Smith Freehills consultant who spent years on the bench of the General Court, says he views the evolution of the parental liability issue as particularly troublesome. For years now, the courts have granted DG Comp an “extremely wide interpretation of the notion of parental liability,” to the point that it would require a heretofore unknown amount of evidence and legal wrangling to convince either of Europe’s reviewing courts that a parent company had no control or knowledge of its subsidiary’s actions.
Even after the Elf Aquitaine decision, the evidentiary burden remains so high for parent companies to disprove the presumption that they exert control over the illicit activities of their subsidiaries, a company has never actually succeeded in doing so, Vesterdorf says.
Even in cases where, logically, a company could not have exerted influence over its subsidiary or known about its cartel activity, EU courts hesitate to overturn the presumption of liability that ties parent companies to the actions of their subsidiaries. So long as DG Comp can use corporate structure, incorporation papers or other documents to show that a parent company owns a controlling stake in the cartel participant, DG Comp will penalise that parent for the subsidiary’s actions and the courts will very rarely challenge that arrangement.
There are numerous examples of the courts turning down such arguments against the presumption over the past five years. In one case, Dow Chemical attempted to convince the courts that it should have sidestepped punishment for the role of DDE, a joint venture between Dow and DuPont, in a chloroprene rubber cartel. But while Dow may have presented evidence that it was unaware of DDE’s participation in the conspiracy, the Court of Justice found that a company does not have to be aware of a subsidiary’s conspiracy to be held liable for it. And although DDE was ostensibly separate from Dow and DuPont economically, parent companies may still influence a joint venture’s overall business strategy, the court ruled.
That trend continues in more recent appeals, records show. Last year, the General Court threw out an appeal from Evonik Degussa and AlzChem opposing DG Comp’s decision to fine them for the actions of their former subsidiary, SKW Stahl-Metallurgie, in conspiring to fix prices in the calcium carbide market. The court upheld fines of nearly €5 million, despite the parent companies’ arguments that they were functionally separate from their subsidiary and had explicitly instructed SKW executives to obey competition law. In September this year, EU advocate general Paolo Mengozzi backed the Court’s decision and recommended that the Court of Justice follow its lead.
The fines often attached to such decisions worry Vesterdorf; he says that punishing companies for the actions of the smaller companies they buy, or of their joint venture partners, could potentially slow or derail partnerships or buyouts that would otherwise benefit consumers.
He and others suggest a simple fix. Flip the burden of proof so that the Commission must show a clear economic connection between a parent company and its subsidiary, rather than requiring companies to prove the negative: that they do not control their subsidiary’s potentially illicit behaviour. “Isn’t it for the Commission to prove and not for the companies to unprove?” Vesterdorf asks.
Of course, he understands the motivations of the Commission: DG Comp’s fear that, if left unchecked, major European companies will establish subsidiaries and joint ventures to carry out the dirty work of price fixing, that then can be left for dead (or bankrupt) when the trustbusters come calling.
But the courts need to help strike a balance between those fears, and the right of companies to defend their innocence if they truly had no control over the actions of an entity they own. Under the current presumption, “you can be in a situation where you have done absolutely nothing and you have no way to prove it because the commission simply says: look at the statutes. You need a balance,” Vesterdorf says.
Observers say that while the parental liability rulings have chipped away at the perception that DG Comp decisions are infallible in the eyes of the courts, most of the successful court appeals happened because of relatively minor mistakes in DG Comp’s calculations. In some cases, the commission included additional years of cartel activity that it struggled to prove in its charging documents, or held companies accountable for a single, continuous cartel infringement when the proof simply wasn’t there.
DG Comp officials declined to comment for this story.
These are serious mistakes, observers say – but also mistakes that can be expected, given the clandestine nature of cartel conspiracies. The companies involved in these cases often do their best to shield evidence from the Commission, particularly when it involves the length or level of their involvement in a cartel. When the Commission then charges a company, the defendant is quick to argue to courts that the duration and extent of its participation was less than what the Commission described.
Sometimes those arguments win over the courts, and another DG Comp fine is slashed or overturned. The Commission is improving its decisions all the time, practitioners say, but when flaws do appear in DG Comp’s decisions, Europe’s courts appear willing to correct them.