European Union: sustainability, settlements and private enforcement

In summary

This article highlights recent EU competition law developments regarding sustainability objectives, with the European Commission trying to find an equilibrium between protecting competition law’s primary efficiency rationale and accommodating the EU’s larger sustainability goals. It also focuses on recent case law reviewing the Commission’s staggered hybrid settlement procedures and their compliance with the non-settling party’s fundamental rights. Finally, it considers some important developments in damages actions and, more specifically, the ECJ’s Sumal decision.

Discussion points

• Chapter on sustainability in the Draft Revised Horizontal Guidelines
• Pometon and Scania and the staggered hybrid settlement procedure
• HSBC and procedural errors in staggered hybrid settlement cases
• Downward liability for cartel infringements recognised in Sumal
• RegioJet and access to documents in private damages actions

Referenced in this article

• Draft Revised Horizontal Guidelines, Chapter 9 (Sustainability Agreements)
• European Commission, Car Emissions (AdBlue), 8 July 2021
• General Court, Icap, 10 November 2017
• European Court of Justice, Pometon, 18 March 2021
• European Court of Human Rights, Karaman v Germany, 27 February 2014
• General Court, Scania, 2 February 2022
• European Court of Justice, Sumal, 6 October 2021
• European Court of Justice, Dow Chemicals, 26 September 2013

Introduction

Significant developments have taken place in the EU during the past year in relation to the public and private enforcement of article 101 of the Treaty on the Functioning of the European Union (TFEU). One such development is the European Commission’s (the Commission’s) clearer articulation of the relationship between competition law and sustainability goals in a new chapter on sustainability agreements in its Draft Revised Horizontal Guidelines (DRHG). ^[1] The guidelines contain important clarifications and could have a big impact in the coming years, should undertakings choose to put in place agreements with a sustainability angle.

Developments have also taken place as regards the hybrid settlement procedure. After some years of uncertainty concerning the Commission’s ability to implement staggered hybrid settlement procedures, the European Court of Justice (ECJ) and the General Court have now mostly clarified the requirements with which the Commission’s decisions have to comply to avoid any infringement of the presumption of innocence. Furthermore, a recent Advocate General opinion sets out the appropriate procedural consequences in the case of breach of such principle.

Finally, this article considers developments in private damages claims, in particular the ECJ’s Grand Chamber judgment in Sumal creating the possibility for claimants to sue the subsidiary of a company found liable for infringing article 101 TFEU and AG Szpunar’s opinion in RegioJet on the disclosure of evidence.

Competition law and sustainability

Whether and to what extent competition law should take sustainability goals into consideration has been vividly debated in the past year. Agreements between competitors that pursue one or more sustainability objectives ^[2] can overcome market failures like the first mover disadvantage. ^[3] However, competition law can constitute a barrier for an undertaking’s willingness to cooperate even in the sustainability space, given the potentially high fines if competition laws are breached. National competition authorities have also explored the possibility for permissible cooperation on sustainability issues, starting with the Dutch Authority for Consumers and Markets (ACM), who published draft guidelines on sustainability ^[4] that have earned much attention EU-wide. This trend has been followed by other national authorities, ^[5] as well as by some national legislators. The Austrian legislator, for example, has recently amended its national equivalent of article 101(3) TFEU, integrating the notion of ‘agreements significantly contribut[ing] to an ecologically sustainable and climate neutral economy’ into the scope of the exemption. ^[6]

At European level, after publishing a policy brief entitled ‘Competition Policy in Support of Europe’s Green Ambition’ in September 2021, ^[7] the Commission is now in the middle of introducing (or reintroducing) ^[8] a chapter on sustainability agreements in the new DRHG, published on 1 March 2022. While giving a broad definition of ‘sustainability’, which includes economic, environmental and social aspects (in line with article 3 of the TFEU), ^[9] the DRHG does not substantively change the analysis of agreements under either article 101(1) or article 101(3) TFEU.

The DRHG gives helpful clarification as regards the type of sustainability-related agreements that should fall outside the scope of article 101(1) TFEU. This includes agreements on the creation of databases containing information about suppliers that have sustainable value chains, or distributors selling products in a sustainable manner without requiring customers to purchase from those suppliers. Industry-wide awareness campaigns of the environmental footprint of consumer consumption are also mentioned as falling outside of article 101(1) TFEU.

However, the option to consider sustainability agreements to fall outside article 101(1) if the restraints to competition are inherent or necessary for the pursuit of a legitimate objective, as the ECJ did in Albany, ^[10] Wouters ^[11] and Meca-Medina, ^[12] has been rejected. The DRHG instead merely considers that if an agreement genuinely pursues a sustainability objective, this should be taken into consideration when assessing whether the restriction is ‘by object’ or ‘by effect’. ^[13] Furthermore, the DRHG lays out a ‘soft safe harbour’ for sustainability standardisation agreements, providing seven conditions that must be met for such agreements to fall outside the scope of article 101(1). ^[14] However, some of these conditions call into question whether the safe harbour will be able to be applied successfully in practice:

• Under the second condition (that the sustainability standard ‘should not impose on undertakings that do not wish to participate in the standard an obligation to comply with the standard’), it is unclear if a standard that, due to its success, would eventually become an indirect obligation for any company that wants to remain competitive on the market, would fall outside the scope of the soft safe harbour.
• Furthermore, the sixth condition requiring that the sustainability standard ‘should not lead to a significant increase in price or to a significant reduction in the choice of products available on the market’ appears contrary to the objective of a sustainability standard itself, which is precisely to be able to sell a more sustainable good at its ‘true’ price (ie, the price incorporating negative externalities on for example, the environment, like damages linked to pollution).

Although the DRHG also lists agreements falling outside of article 101 TFEU, the Commission has been clear that it will keep its hard stance on cartels that aim at lowering sustainability standards: in its Car Emissions (AdBlue) ^[15] decision, car manufacturers discussed the sizes and refill ranges of AdBlue tanks (a technology reducing NOx emissions) but also reached a joint understanding on the average estimated AdBlue-consumption. The Commission considered that by exchanging information about characteristics and performance indicators in respect of AdBlue tank sizes, refill ranges and assumed average AdBlue-consumption, reducing uncertainty about NOx-cleaning beyond regulatory requirements and the customer-friendliness of AdBlue refills, the parties infringed article 101(1) ‘by object’. ^[16] This exemplifies the real risk for legitimate cooperation on technical standards to deviate into a hardcore infringement of competition law. It is also the first time that the Commission concludes that collusion on technical development amounts to a cartel. ^[17] It therefore remains important for companies to seek antitrust counselling when they initiate cooperation on technical matters with competitors.

As regards the existing article 101(3) exemption, ^[18] the DRHG issues more guidance as to the criteria to take into consideration for it to be applied:

• The Commission now explicitly states that the condition of creating efficiency gains includes ‘the use of cleaner production or distribution technologies, less pollution, improved conditions of production and distribution, more resilient infrastructure or supply chains, better quality products, etc.’ ^[19]
• On the condition that customers receive a fair share of the benefits, the Commission did not significantly deviate from its current position. While individual use ^[20] and non-use value ^[21] are taken into consideration, collective benefits ^[22] are, in principle, not taken into account, unless the group of consumers affected by the restriction of competition and benefiting from the efficiency gains is substantially the same. ^[23] In practice, this strongly narrows down the possibility for undertakings to cooperate on significant sustainability parameters. For instance, airlines agreeing to greener fuel would reduce pollution and hence create benefits to society as a whole – however, this would not fully compensate passengers (customers) for the price increase linked to greener fuel, each of them benefiting only to a limited extent from reduced pollution. ^[24] This is also a much more conservative approach than that of the Dutch ACM, which considers that if agreements reduce environmental damage and help comply with an international or national standard, benefits to society as a whole should suffice to meet the ‘fair share’ requirement under the national equivalent of article 101(3) TFEU. ^[25]

These clarifications of the substantive aspects of the DRHG are welcome. However, they will not remove the necessity for companies to self-assess compliance with article 101 TFEU, which still entails a detailed assessment and some level of uncertainty. Equally, the Commission mentioned in its September 2021 policy brief that it would be ready to issue comfort letters to undertakings seeking guidance on sustainability agreements, ^[26] which might in practice be the more efficient way to reduce uncertainty, should undertakings be willing to come forward and submit sustainability agreements to the Commission for review in future.

Judicial review of hybrid settlements

During the past 10 years, more than half of the Commission’s cartel infringement decisions have been settlement decisions. ^[27] The settlement procedure allows parties to receive a 10 per cent fine reduction in exchange for their acknowledgement of their participation in, and liability for, a cartel. ^[28] The settlement process proved beneficial for both sides, allowing the parties to pay lower fines and the Commission to invest fewer resources in cases with a significantly lower chance of being challenged before the courts, given the parties’ acceptance of an infringement. With the proliferation of private damages actions, parties may nonetheless prefer to instead fight cartel allegations to reduce their exposure to such damages actions, which can often prove costlier than the fine reduction obtained through the settlement process.

One consequence of the above is the increased likelihood of hybrid settlements, in which one or more parties decide not to join or to withdraw from the settlement procedure initiated by the Commission. ^[29] In hybrid settlement cases, the Commission has most often opted for a staggered approach, whereby it concludes the accelerated procedure against the settling parties first and adopts the standard procedure against non-settling parties at a later point in time. ^[30] In practice, this has undermined the traditional efficiencies of the settlement procedure by introducing full contested procedures at Commission level as well as numerous court appeals.

The Icap judgment of the General Court, for example, questioned the legality of the hybrid settlement procedure. The Court upheld in part the non-settling party’s claim that the Commission violated its presumption of innocence when the factual description of the settlement decision described the non-settling party’s role as a ‘facilitator’. ^[31] The ECJ has shed more light on this issue in the Pometon judgment, ^[32] in which the non-settling party also claimed that the settlement decision violated their presumption of innocence. In Pometon, the ECJ clarified the legal standard for judicial review to ensure compliance of the Commission’s settlement decisions with the requirements of the presumption of innocence. First, it accepted the principle that, in hybrid staggered settlement procedures, it may be necessary for the Commission to address certain facts and behaviours relating to the non-settling party in the settlement decision. ^[33] By reference to case law from the European Court of Human Rights (ECtHR), ^[34] the ECJ then established that it is for the European courts to verify that (1) the settlement decision is drafted with sufficient precaution to avoid premature judgment as regards the non-settling parties and (2) references to non-settling parties are only made where necessary. ^[35] The decision as a whole must be reviewed when assessing compliance with such factors, and cannot be limited to the mere assessment of the explicit references to the non-settling parties. ^[36]

More recently, in Scania, the GC conducted a legal review of the hybrid staggered procedure adopted in the Trucks cartel. ^[37] The applicants’ claims were based on the breach of the principle of good administration (duty of impartiality), breach of the rights of defence (article 48(2) of the Charter) and breach of the presumption of innocence (article 48(1) of the Charter). The General Court applied the methodology set out by the ECJ in Pometon. It found that that the settlement decision references to Scania did not contain any allusion to Scania’s liability in the context of anticompetitive conduct. It also reviewed the settlement decision as a whole and concluded that references to conduct of ‘“amongst other” the addressees of the settlement’ did not contain a clear declaration of Scania’s liability and thus did not entail a premature judgment. ^[38] This ‘clear declaration’ requirement is directly drawn from the ECtHR case law, ^[39] and gives some leeway to the Commission when drafting the settlement decision.

The applicants also alleged breach of the presumption of innocence on the basis that the Commission’s settlement decision took a final position on facts that are the same for all parties, including Scania. The General Court rejected the argument based on the obligation for the Commission to assess Scania’s liability separately from that of the settling parties, during the standard administrative procedure (a tabula rasa situation) as well as its obligation to take account of the party’s arguments and to review the file in light of such arguments (de novo review). ^[40] Similarly, the overlap of evidence used with regard to settling and non-settling parties did not breach the principle of presumption of innocence for essentially the same reason that the non-settling party would, in any case, have the opportunity to challenge such evidence – though, in practice, the fact that this would only be possible at a later stage in the proceedings somewhat undermines the General Court’s finding on this point. The General Court further rejected the applicant’s claim alleging that, by issuing the settlement decision, the Commission was no longer in a position to reassess the facts or adopt other investigative measures (eg, sending out requests for information following the defendant’s rebuttal of its factual assessment) without calling into question the earlier settlement decision, leading to a breach of its obligation to conduct an impartial investigation. The Court instead reaffirmed the Commission’s discretion in conducting investigative measures and considered that the applicant did not adduce evidence demonstrating any bias in the way the Commission conducted its investigation. ^[41]

A further issue first addressed in Icap ^[42] and discussed at length in AG Emiliou’s opinion in HSBC (EIRD) ^[43] concerns the legal consequences of finding that the settlement decision violated the non-settling party’s presumption of innocence. The EU courts are not materially competent to annul the settlement decision as they are adjudicating exclusively on the non-settling party’s claims in relation to the standard decision. In Icap, the General Court therefore assessed whether the breach of the presumption of innocence by the settlement decision led to a lack of objective impartiality of the Commission in the standard procedure. However, the finding would lead to the annulment of the decision only if the non-settling party were able to establish that, were it not for that irregularity, the standard decision ‘would have been different’. ^[44] Absent such evidence in Icap, the General Court rejected that plea in full. ^[45] In his opinion, AG Emiliou criticises that approach, which he coins as the ‘most stringent form of the harmless error test’ (ie, the test that a procedural irregularity does not lead to the annulment of the decision unless the result ‘would have been different’). ^[46] He compares it to the lighter form of the ‘harmless error test’, requiring the applicant to merely prove that the decision ‘might’ have been different. ^[47] In the latter situation, a mere possibility suffices while under the former standard the ‘what if’ scenario must be one of near certainty. ^[48] AG Emiliou pleads for the adoption of the lighter harmless error test so that parties are only required to show that the result ‘may’ have been different absent the procedural infringement. He justifies this conclusion on the grounds that lack of impartiality or breach of the presumption of innocence are a ‘serious infringement (…) that is likely to have repercussions on the outcome of the procedure’. ^[49]

To conclude, while the overall procedural requirements for validly conducting hybrid staggered settlement procedures seem to be largely clarified by the case law, there is still some uncertainty regarding the practical impact of any findings of breaches of such requirements, and it remains to be seen if AG Emiliou’s opinion will be followed by the courts. Nonetheless, the non-settling party’s appetite for litigation on this issue does not seem to have reduced, given, for example, the ongoing similar actions in the Bioethanol case. ^[50]

Downward liability for cartel infringements

In the important Sumal ^[51] judgment from October 2021, the Grand Chamber of the ECJ broadened the possibilities for victims of a cartel to claim damages by suing the subsidiary of an undertaking found to have participated in a cartel, even though the subsidiary itself was not involved and hence not found to be liable for the infringement.

The Sumal judgment takes place in the context of a damages action following the Trucks cartel, in which the Commission fined five truck manufacturers for collusion on truck pricing that lasted for 14 years. ^[52] Sumal is a Spanish company that bought two trucks from the Spanish subsidiary of Daimler, Mercedes Benz Trucks España (MBTE). Following the Commission decision finding Daimler to have participated in the Trucks cartel, Sumal sued MBTE for damages before the Spanish courts. However, MBTE is not mentioned in the Commission decision and contested that it cannot be held liable for the anticompetitive practices of its parent company. The Spanish court sent a request for a preliminary ruling to the ECJ, asking in essence whether a subsidiary of a company that has been found liable by the Commission for anticompetitive practices can be sued by a victim of such practices, even though the subsidiary is not referred to in the decision.

The central notion of this decision is that of ‘undertaking’. An ‘undertaking’ is an autonomous notion of EU law that is defined by its economic unit (ie, a unitary organisation of personal, tangible and intangible elements, which pursues a specific economic aim on a long-term basis), ^[53] independent of the legal entities behind it. A parent company is presumed to pertain to the same economic unit as its wholly owned or wholly controlled subsidiary, ^[54] and thus they are considered as a single undertaking for competition law purposes. The ECJ also recalls that ‘[w]hen such an economic unit infringes Article 101(1) TFEU, it is for that unit, in accordance with the principle of personal responsibility, to answer for that infringement’. ^[55]

To answer the question referred to it, the ECJ had to determine whether the notion of undertaking must be the same when finding a subsidiary liable for the conduct of a parent (downward liability) as it is for a parent that is liable for the conduct of its subsidiary (upward liability). Pursuant to the right of the victim to be fully compensated for anticompetitive harm ^[56] and the ‘functional concept’ of the notion of undertaking that must be assessed by reference to the subject matter at hand, ^[57] the ECJ concluded that a double condition must be fulfilled for a victim of anticompetitive conduct to sue a subsidiary for the anticompetitive conduct of its parent. It must prove (1) that both subsidiary and parent belong to the same economic unit and (2) there is a specific link between the economic activity of that subsidiary and the subject matter of the infringement. ^[58]

In practice, this judgment grants wider access to private damages actions for claimants. In particular, in cases where the parent company is situated outside of the EU, it will make a significant difference for a claimant to be able to sue a subsidiary in their home jurisdiction, leading to reduced cost of litigation, service and enforcement, or possibly a more claimant-friendly jurisdiction for damages actions.

Requests for disclosure of evidence

Another important development relates to the possibility for a claimant in an action for damages to request disclosure of evidence from an undertaking allegedly infringing competition law, even though that investigative procedure has been suspended.

In RegioJet, ^[59] the Czech competition authority opened investigations against České Dráhy for abuse of dominant position. Three years later, RegioJet initiated an action for damages against České Dráhy before a local court. However, both proceedings were put on hold upon the Commission’s opening of an investigation against České Dráhy, ^[60] and until a final decision was issued on that matter at EU level. Before the suspension of the civil damages proceedings, RegioJet asked the local court to order the defendant to disclose diverse sets of evidence, in accordance with the Czech law implementing Directive 2014/104 ^[61] (the Damages Directive) on actions for damages. That request was partially granted by the local court and upon appeal, the Czech Supreme Court issued a request for a preliminary ruling to the ECJ. In his opinion, AG Szpunar considers, inter alia, the question of whether the opening of a procedure by the Commission against an undertaking prevents a court adjudicating the private damages claim relating to the same matter to order the disclosure of evidence. First, AG Szpunar notes that the suspension of the damages procedure before national courts following the opening of an investigation by the Commission is neither required by article 16(1) of Regulation 1/2003 ^[62] nor by the Damages Directive. Hence, as the suspension of the proceedings is not required under EU law, AG Szpunar concludes that the Damages Directive does not prevent a national court from ordering the disclosure of evidence in line with articles 5 and 6 of the Damages Directive, provided that such disclosure is appropriate, proportionate and necessary. ^[63] The AG further considers that such measure does not put at risk the uniform application of EU competition law, as the disclosure of evidence does not equate to a ‘negative’ decision that would otherwise contradict the Commission’s decision. ^[64] If followed by the court, such a position would allow plaintiffs to make progress on private damages claims and anticipate more efficiently the resuming of the procedure, even though a Commission decision is pending.

Notes