Are smaller companies hit harder by DG Comp cartel fines?
If any complaint has risen above the usual Brussels din since the 2006 fining guidelines took effect, it’s that small businesses, and businesses that produce a limited number of products, are often disproportionately affected by DG Comp cartel fines.
European Commission data reviewed by GCR shows that, to some extent, those critics are right. Small, medium and single-product companies have been hit with fines near or at the maximum level allowed under EU law - 10 per cent of annual turnover - far more often than companies with diverse product portfolios or global businesses.
Those smaller companies have likely been hit harder for many reasons - including the European-specific scope of their sales, recent financial struggles and so on - but, regardless, DG Comp’s fining guidelines have indeed resulted in small, local companies having to pay a higher percentage of their annual turnover than global heavyweights found to have committed similar cartel violations.
To analyse the data, GCR looked at 221 cartel fines since 2005 in which we could identify the turnover of the company during the previous year - either through commission decisions or other public records. We examined fines before any leniency reductions, and looked at the turnover figures that were publicly available - meaning global turnover for multinational companies.
As the above graph shows, there was a nearly inversely proportionate relationship between the annual global turnover of companies and amount DG Comp fined them for alleged cartel activity as a percentage of that figure. Put simply, the companies fined the most as a percentage of turnover - shown in blue - also consistently made the least amount of money of any company found on DG Comp’s cartel docket.
The graph shows the inverse is also true. Companies with the highest turnovers were consistently hit with the lowest levels of fines compared with their annual turnover.
In all, companies fined less than 5 per cent of their annual turnover averaged more than €32 billion in turnover the year before DG Comp issued the fine, GCR data shows. Companies fined more than 5 per cent of their yearly revenues, however, averaged only €334 million in total turnover.
GCR’s analysis shows that the discrepancy continues when looking at fines on a percentage-by-percentage basis. For example, companies fined more than 1 per cent of turnover, on average, made more than €2.3 billion in turnover the prior year. But companies fined more than 9 per cent had an average turnover of approximately €289 million - almost 10 times less.
Observers say that while these observations may be obvious, they are also important. Cento Veljanovski, founder and managing partner of economics consultancy Case Associates, says that he ran GCR’s data through an in-house statistics program and found the relationship between the size of a company and fines as a percentage of turnover to be “statistically significant.”
Veljanovski points out that while there is a significant difference between the fines imposed on the few very large firms and the fines imposed on the remaining majority of companies, the differences in fines for companies outside of the top 1 or 2 per cent in terms of turnover is less pronounced.
Plus, he says, the relationship between the size of a company and its cartel fine may hinge on other factors, including the type or geographic scope of a cartel. For example, large firms are typically global in the scope of their business, and only conduct part of their business in Europe, whereas smaller companies involved in cartels may be active only within the EU - leading to steeper fines according to their sales, as the 2006 fining guidelines dictate.
A closer look reveals that some of what Veljanovski suggests might indeed play a factor.
Because of size of the cartelised industry and other factors, some cartels were hit harder as a percentage of turnover than others, the data shows. Take fines from the chloroprene rubber cartel, which DG Comp handed down in December of 2007. Four of the six companies fined in that cartel made more than €20 billion in turnover the year prior - including such global powerhouses as Eni, DuPont, Bayer and Dow Chemical - and no company made less than €2 billion in turnover.
The fines in that cartel as a percentage of turnover were quite low, as one might expect. Yet the company with the lowest global turnover, Denka Chemicals, at €2.1 billion, still received the highest fine as a percentage of its annual turnover - €47 million, or just more than 2 per cent.
Fines in DG Comp’s investigation of an international removal services cartel provide a different example. In that case, many of the targeted companies were relatively small: five of the 11 companies fined had turnovers of less than €5 million the previous year. The fines in that case were considerably higher as percentages of turnover. Six companies were fined more than 7 per cent of their annual revenues, while five companies - the same five with turnovers of less than €5 million - were fined either at or near the 10 per cent of turnover threshold.
“Nonetheless,” Veljanovski says of GCR’s findings, “it is newsworthy.”
Dirk Schroeder, partner at Cleary Gottlieb Steen & Hamilton LLP in Cologne, says that the numbers are no surprise to practitioners familiar with the commission’s fines in recent cartel cases.
Indeed, he says, smaller companies tend to focus on just a few products, and a large proportion of what they do can be affected by cartel activity. Meanwhile, cartel fines only affect a fraction of the business activity of a more diverse company, he says. “There is no injustice in this,” Schroeder says.
It may also be noteworthy that many companies hit with fines for recidivism between 2005 and 2010 were both among the companies with the highest turnovers of any targeted by DG Comp’s cartel investigations, and were often fined less than 1 per cent of their annual turnover for breaking competition law.
For example, DG Comp in 2006 fined Shell more than €160 million for its alleged role in the Butadiene Rubber cartel - a fine which equalled just 0.07 per cent of Shell’s annual turnover the year prior. DG Comp increased that fine by 200 per cent, as the company had previously been fined €180 million in the Netherlands’ bitumen cartel - a fine that totalled just 0.04 per cent of the companies prior year turnover before its own multiplier for recividism. Taking away all increases and reductions in fines, Shell has allegedly been involved in three cartels that DG Comp has decided in the past five years, issuing fines against the company totalling 0.15 per cent of its annual turnover.
Fines are similar for several other recidivists as well, including Arkema, Siemens, Eni and others. In the dataset GCR reviewed, no recidivist was issued a base fine of more than 1.3 per cent of its annual turnover for fixing prices.