EU: Hybrid Antitrust Settlements

Introduction

The Commission Notice on the conduct of settlement procedures (the Settlement Notice)^[2] was introduced with the objective of making cartel enforcement procedures more efficient and effective both for the European Commission (EC) and the companies involved. Throughout the entire process the EC and the parties can, respectively, withdraw from the process where it appears that the benefits of the process are outweighed by its disadvantages. If a party decides not to engage in or to withdraw from the settlement proceedings, the EC normally reverts to a contested procedure in relation to the non-settling party and generally proceeds with settlement discussions with the other parties, leading to two decisions in a single case – a contested decision and a settlement decision, respectively. The overall procedure is known as a ‘hybrid’ or ‘partial’ settlement, and so far the EC has only pursued it in cartel matters.^[3]

Building on Chapter 3, in this chapter we provide a short description of how EU hybrid settlements arise, and how frequent such cases are in practice. We then focus on the practical challenges and opportunities of navigating hybrid settlements, both from a settling and a non-settling party perspective. Finally, drawing on the latest judgments of the EU courts, we reflect on how the practice of hybrid settlements might develop over the coming years and what this means for companies being investigated for breaches of EU competition law.

The hybrid process

When determining whether a case is suitable for settlement, the EC will have regard to a number of factors,^[4] including the prospect of achieving procedural efficiencies.^[5] The effectiveness and efficiencies that underpin the settlement process are best achieved where all parties to a case decide to pursue settlement discussions and ultimately agree to settle the case with the EC. It is for this reason that, when deciding whether to initiate settlement proceedings, the EC will have particular regard to the extent to which one or more parties already indicate throughout the investigatory phase of a case that they are in disagreement with the EC’s views on the facts or liability. If a number of parties do not appear interested in pursuing settlement discussions, the EC may well decide not to initiate settlement proceedings at all, and there is no right as such for the remaining parties to request the EC to initiate such proceedings.^[6]

Parties under investigation by the EC for alleged cartel conduct have the right to refuse to settle. In practice, this refusal can be expressed in different ways and at different points in time throughout the process.

• Parties have the right to refuse to engage in settlement at the outset, by not responding to the EC’s invitation to engage in settlement discussions, which would otherwise mark the start of the settlement proceedings.^[7]
• Companies retain the right to withdraw from settlement proceedings at any time until a formal settlement submission is requested by the EC,^[8] and no particular formalities need to be followed to abandon settlement discussions.
• Parties can also unilaterally revoke their settlement submissions where the statement of objections (SO), and ultimately the final decision, does not reflect the parties’ settlement submissions.^[9]

Where one or more parties choose not to pursue the settlement process, or discontinue the settlement discussions, the EC will revert to the normal, contested, procedure.^[10] The EC retains a broad discretion to discontinue settlement proceedings in respect of all parties at that point, but it is known to have exercised this discretion in only one prior case.^[11] In all other cases, the EC either did not initiate settlement proceedings in the first place, or proceeded with hybrid settlements (i.e., it continued settlement discussions with parties willing to remain part of the settlement processes, and reverted to the contested procedure in respect of all other parties). To date, of a total of 34 EU cartel settlements the EC has concluded seven hybrid settlements (in the Animal Feed Phosphates,^[12] Euro Interest Rate Derivatives,^[13] Yen Interest Rate Derivatives,^[14] Steel Abrasives,^[15] Canned Mushrooms,^[16] Truck Producers^[17] and Canned Vegetables^[18] cases).

Where a case proceeds as a hybrid case, there are a number of key procedural differences for settling and non-settling parties, which can have important practical consequences (e.g., impact on the time and resources involved in bringing a case to an end and the amount of information that becomes publicly available and can be used by damages claimants in subsequent civil claims). The following are of particular note.

Access to file

Under the settlement procedure, settling parties are provided with access only to key evidence – which is usually far less than the totality of evidence on the file.^[19] Where the EC reverts to the contested procedure, it will need to provide the non-settling party with full access to the relevant case file, including all files obtained from the settling parties.^[20] This adds significant burden for all parties involved, including settling parties and the EC. Settling parties will in most cases choose to exercise their right to have business secrets or other confidential information redacted from any documents that form part of the case file,^[21] which in and of itself is a long and strenuous process both for the parties and the EC.

SOs, oral hearings and written response to the SO

Parties pursuing the settlement process would need to confirm that they received sufficient information regarding the objections of the EC, and that they waive their rights to an oral hearing, or a response to the SO.^[22] In practice, a settlement SO is far less detailed and much shorter than the SO adopted by the EC in a contested case. This, together with the absence of an oral hearing, increases the efficiencies of the process for the settling parties and the EC alike. However, in a hybrid case, non-settling parties would not have waived their rights of defence and the EC will need to proceed with the adoption of a full, more detailed SO addressed to the non-settling parties (only) and the setting of an oral hearing with the non-settling parties.

Timing of adoption of the final decision

Depending on when a party decides to withdraw from the settlement processes, the EC has the option to either adopt the settlement and contested decisions at the same time, or to adopt the settlement decision before it completes the contested process. This ‘staggered’ hybrid approach has received criticism and challenges in the EU courts, as further described below.

Information published in the final decision

While settlement decisions do establish the existence of an infringement and provide details of key aspects of the infringement facts (e.g., parties involved, type of conduct, duration), they are streamlined and contain a lot less detail than a contested decision. If a party decides not to pursue settlement, the EC will, in addition to the settlement decision, also adopt a full and more detailed decision addressed to the non-settling party.

Practical advantages and challenges of a hybrid case

Hybrid cases trigger a number of different complex issues that need to be navigated strategically by settling parties and non-settling parties.

For parties that have engaged in settlement discussions and have decided to ultimately settle the case with the EC, hybrid cases create a number of challenges and undermine a number of the benefits of the settlement process. For instance, as follows.

• Settling parties may be ordered to disclose to non-settling parties details of their settlement discussions with the EC. For instance, it has been reported that in a hybrid case that is yet to be concluded, the two non-settling parties in the case requested and ultimately received access to redacted copies of documents exchanged between the EC and the settling party during the settlement procedure.^[23] This included access to the settling party’s technical papers (‘non papers’) and minutes of meetings with the EC, on the basis that those particular documents were not found to be more sensitive or confidential beyond what was stated in the formal settlement submissions that had already been accessed by the non-settling parties. The case shows that unless settling parties are careful in how they communicate with the EC, those communications may well become accessible to non-settling parties.
• Settling parties involved in a hybrid case will need to accept that the case may not conclude as quickly as in a ‘regular’ settlement case. An immediate consequence of the process, as described above, is that a hybrid case will take much longer to conclude than a settlement case. This could be either because the EC has decided to put the settlement process with the settling parties on hold until the contested procedure with the non-settling parties has run its course (i.e., including full access to file, preparation of a detailed SO, oral hearings and written responses to the SO), or because the full contested procedure continues after the settlement decision has been adopted. In addition, contested cases can take several years to conclude, even after adoption of the decision, because the contesting party will usually appeal the contested decision to the European General Court and subsequently to the European Court of Justice. The overall case will therefore be put to rest only after many years, and may continue to attract negative publicity for several more years.^[24]
• Settling parties will have limited opportunities to be involved in the contested procedure of the non-settling party. The EC has generally been reluctant to accept interventions or mere participation by the settling parties in the non-settlement process. While settling parties may generally seek to participate in the non-settling parties’ procedure as interested third parties,^[25] in practice, they are provided with very limited information. This in turn makes it difficult, if not impossible, for the settling party to comment on whether the outcome of the non-settlement procedure would adversely affect its interests.^[26] Even if the contested decision is not addressed to the settling parties, this is a particularly important downside for settling parties who throughout the settlement processes have worked to reach a ‘common understanding’ with the EC as to the description of the facts and liability in the ‘settled’ case, but have very limited rights or power to comment on this in the context of the contested case.
• Settling parties should be aware that the contested case against the non-settling party inevitably results in an infringement decision that is significantly more detailed than the settlement decision. While the infringement decision will not be addressed to the settling parties, references to the underlying facts and conduct (which logically would also implicate the settling parties) will be included in the contested decision; these references will be significantly more detailed than those included in the separate settlement decision. These additional details are then available to damages claimants issuing proceedings against the settling parties, which is detrimental to the settling parties and undermines a key benefit of the settlement process.
• Settling parties involved in a staggered hybrid case are more likely to be the first target of follow-on damages claims. In a staggered hybrid case, the settlement decision is adopted before (and often long before) the contested decision – which makes the settling parties ‘first targets’ for damages claimants. From a damages claimant’s perspective, a settlement decision is sufficient to issue follow-on proceedings,^[27] without the need to wait for the EC to adopt an infringement decision against all the remaining parties (in this case, non-settling parties). This timing may therefore result in settling parties facing private damages actions for the entire loss suffered by the claimants. In practice, settling parties will not only be the first to attract negative publicity, but will later need to recoup some of the damages paid to claimants by issuing proceedings against the non-settling parties to claim back the damage for which the latter would be jointly and severally liable. Furthermore, the fact that non-settling parties may well appeal the ordinary contested procedure decision could result in settling parties being able to claim contribution when the EC’s decision becomes final.
• Settling parties will not benefit from a successful appeal by the non-settling party. Settling parties are significantly less likely to appeal the EC settlement decision, at least on substantive grounds.^[28] However, there is nothing to stop a non-settling party from appealing a contested decision on substance, and indeed that will be the likely outcome in most contested cases. If the appeal of the contested decision is successful that success is limited to the non-settling party. For the settling parties, the settlement decision will, however, continue to remain binding. While this has not yet been tested at EU level, HSBC’s appeal to the European Court of Justice^[29] (as a non-settling party) of the EC’s contested decision in the Euribor case,^[30] if successful, may well set a precedent.

Non-settling parties also need to carefully navigate a number of strategic considerations when deciding not to pursue or to abandon settlement discussions, and challenge the EC’s findings, including the following.

Timing considerations

As noted above, parties have the option to withdraw from the settlement process at any time until they have submitted their settlement submission. The timing of that decision is, however, very important. Settlement discussions are bilateral, and once a party has opted out of the settlement process it will no longer be privy to the EC’s approach to case-scoping, views on liability or approach to fine calculation. From that perspective, it would generally make sense to participate in the settlement process and engage in settlement discussions with the EC until the final stages of the process. For instance, before a party is requested to submit a settlement submission, it will have been made aware of the EC’s final views on the scope of the case, on liability and on the maximum fine that the party will have to pay if the case is successfully settled. If the party disagrees at that point with any or all of these factors, it has the option to make a more fully informed decision and withdraw from settlement. Withdrawing from settlement sooner than this denies the non-settling party the opportunity to see the best possible outcome under the settlement process.

Similarly, there will likely be certain factors at that point that will be ‘locked in’ and would not subsequently change in the contested procedure, if the EC continues the settlement processes with the remaining parties. For example, the products, customers or territories affected by the infringement and the duration of the infringement is likely to remain the same across the settlement and contested decisions. Actively engaging with the EC on these factors during settlement until the last possible opportunity for withdrawal generally carries a lot of merit. In addition, given that the content of the settlement discussions is not used as evidence and is without prejudice to the contested procedure, there is limited downside in agreeing to participate in settlement discussions at the outset.^[31]

Penalty considerations

While the non-settling party loses the right to the 10 per cent settlement discount, non-settling parties cannot otherwise be penalised for choosing to withdraw from settlement proceedings. The European General Court specifically held that the EC must not discriminate between settling and non-settling parties in the same cartel case in the methodology used to determine the amount of the fine.^[32]

However, in practice, while the principle of non-discrimination between settling and non-settling parties is fully respected, the EC enjoys considerable discretion when determining fines. In particular, where a party decides to withdraw from settlement discussions it ought to weigh not only the loss of the settlement discount but also how its objections to the EC’s case may impact other fine parameters, such as the leniency discount.^[33] For instance, the non-settling party in the Animal Feed Phosphates case alleged that it was penalised for withdrawing from the settlement discussions by having its fine increased by 25 per cent. The General Court found, however, that the 25 per cent increase in the fine was not a result of discrimination against non-settling parties, but rather a consequence of the non-settling party changing its admissions under the leniency programme, which is separate to the Settlement Notice.^[34]

Presumption of innocence

A recent line of appeals of EC decisions emphasise a particular challenge that non-settling parties face in a staggered hybrid case. Where the settlement decision is adopted before the contested procedure is concluded, non-settling parties have argued that the description of their involvement in the infringement included in the settlement decision breached their presumption of innocence (even if the settlement decision was not addressed to the non-settling party).

While the arguments succeeded in front of the General Court in one prior case,^[35] and the Advocate General also sympathised with this view in a second case,^[36] non-settling parties have not yet been able to obtain an annulment of an infringement decision on this basis, nor were the original settlement decisions annulled.^[37] Moreover, the General Court has most recently stated, in the decision against Pometon (which is currently under appeal with the European Court of Justice), that the EC is not obliged to necessarily delay the settlement procedure in order to issue the settlement decision on the same date as the contested decision, provided the EC ‘fully complies with its duty of impartiality and the presumption of innocence with regard to the party which withdrew from the settlement and chose to have its case dealt with by that institution by means of a specific adversarial procedure’.^[38]

These cases show that, pending a decision from the European Court of Justice, staggered hybrid decisions remain lawful. Whether an earlier settlement decision infringed the non-settling party’s presumption of innocence will be fact-specific and subject to how the settlement decision is drafted by the EC (over which the non-settling party will have no control).^[39]

The future of hybrid cases

The settlement process has been an essential enforcement tool in the EC’s fight against cartels. It has allowed the EC to conclude 34 settlement cases since 2008, freeing up resources to bring other cases. The success of this tool is also illustrated by the EC’s recent initiatives to apply the settlement process by analogy to non-cartel cases.^[40] Despite the challenges and procedural gaps identified in the process, particularly in respect of hybrid settlement cases, the settlement procedure can overall be considered as a very successful enforcement tool, which will continue to be relevant and useful in the future – both for the EC and the parties that are involved in investigations.

For the parties, the right to refuse to participate in the settlement process or to withdraw from settlement discussions will, and should, remain in place. The availability of the option to withdraw from settlement discussions is an essential incentive for the parties to consider settlement, and one that contributes significantly to the progress and success of the settlement discussions.

It is very unlikely that the challenges brought in court recently by parties involved in hybrid settlement cases will deter the EC from using the settlement procedure where its initial screening determines that a case is suitable for a settlement.^[41] The EC may, however, be less inclined to pursue hybrid settlements, given that they diminish the efficiencies obtained otherwise in ‘regular’ settlement cases. Completely abandoning the hybrid model makes little practical sense, nonetheless, as the EC ought not to fully disregard the remaining efficiencies achieved by not having to adversely confront all parties in a case during the administrative proceedings or during appeals in front of the EU courts.

We expect the EC to try to avoid staggered hybrid cases in the future, given the challenges brought to date. In particular, it is difficult to see how the EC might be in ‘a position to determine the liability of the undertakings participating in the settlement without also taking a view on the participation in the infringement of the undertaking which has decided not to enter into a settlement’,^[42] such as to satisfy EU courts that the presumption of innocence of non-settling parties is not infringed. In practice, this means that the EC will look to adopt on the same date the decisions relating to all the parties involved in a cartel (as it did in Animal Feed Phosphates). This is an important characteristic that settling parties ought to factor in their projected timing for the conclusion of the case. While it means that the matter may not conclude as fast as originally hoped, it does bring more certainty to the overall process, and also minimises the risk of the settling parties becoming the first target of follow-on damages actions.

Notes