In its recent judgment in ThyssenKrupp v Uwe Sehlbach (the “Sehlbach Judgment”)1, the Düsseldorf Higher Labour Court (the “Court”) dismissed a claim brought by ThyssenKrupp AG (“Thyssen”) seeking redress from a former managing director for fines imposed by the German Federal Cartel Office (“FCO”). This is the first time a German court decided on – and denied – the recoverability of cartel fines from senior management of the undertakings involved in a cartel. The Sehlbach Judgment brings Germany in line with other jurisdictions such as the United Kingdom (“UK”). In this note, we will first analyse the Sehlbach Judgment in detail (see below I.) and then compare it to the situation in the UK and provide an assessment of its impact (see below II.).
I. The Sehlbach Judgment
In its Sehlbach Judgment, the Court had to rule – on appeal – on a number of damage claims brought by the German steel group Thyssen against its former employee Uwe Sehlbach. Thyssen sought to recover, on the one hand, cartel fines the FCO had imposed against Thyssen for its involvement in the German rail track cartel.2 These cartel fines amounted to €191 million. On the other hand, Thyssen also sought to recover €100 million for a settlement over private damages with one of its customers harmed by the cartel, the German railway incumbent Deutsche Bahn AG (“DB”).
Mr. Sehlbach was over a number of years managing director of a Thyssen subsidiary that was, according to the FCO’s cartel decision, part of the rail track cartel. In addition, he was also part of the executive management at group level. His employment contract was terminated in 2011. Thyssen alleges that Mr. Sehlbach actively participated in the cartel (for example by ordering the purchase and use of encrypted mobile phones to avoid detection); in addition, he allegedly failed to bring the cartel to the attention of the company during two internal compliance audits. Alternatively, Thyssen argued that Mr. Sehlbach was liable because he neglected his supervisory duties as a managing director. Criminal proceedings against Mr. Sehlbach and others for alleged involvement in bid-rigging (which is a criminal offence under German law) are pending.
In its judgment, the Court held in relation to Thyssen’s damage claims for the cartel fines totaling €191 million:
- Cartel fines imposed against an undertaking can, as a matter of principle, not be claimed back from employees who were responsible for/participated in the cartel. This is because cartel fines have, under German law, a quasi-criminal character.
- According to the Court, a criminal sentence imposed against a legal person (in the Sehlbach case Thyssen) cannot – under the disguise of a damage claim – be rolled over onto another person, i.e. Mr. Sehlbach himself. Sentences are personal and thus inseparably connected to the person who committed the act for which a sentence was imposed.
- This is in particular the case for cartel fines. Their “raison d’être” is to cause undertakings to obey the rules and boundaries of antitrust law and to cause, in case of a breach of antitrust rules, to punish the undertaking braking the rules by making it suffer a significant financial detriment in the shape of a fine. According to the Court, however, the punishment of the undertaking could not be achieved if the undertaking was able to roll over its fine onto those employees that were responsible for the breach of antitrust rules. “The fine has to remain with the undertaking and has to hit its shareholders to influence future behaviour. The shareholders are those who chose, employed and appointed the company officers. They will therefore have to bear the consequences of their actions. Eventually, a cartel fine is the realisation of the risk of operating a company. The preventive effect for the company would fall away if the actual addressee could simply seek redress from its officers.”3
- In addition, the German Act against Restraints of Competition (“ARC”) contains different upper limits for cartel fines imposed against undertakings on the one hand and against individuals on the other hand. While the fines imposed against undertakings can amount to up to 10% of the worldwide annual turnover of the respective undertaking, fines imposed against individuals are limited to €1 million (cf. s. 81(4) ARC). This differentiation would be meaningless if the undertaking could pass its fine on to individuals.
With regard to the damage claim over €100 million relating to the settlement between Thyssen and DB over DB’s damages resulting from the cartel, the Court stayed the proceedings pending the outcome of a criminal investigation and trial for bid-rigging against Mr. Sehlbach. The criminal investigation would provide insight on whether Mr. Sehlbach knowingly or at least negligently participated in the cartel.
II. Impact of the Sehlbach Judgment and outlook
The Sehlbach Judgment seems, at first sight, to be at odds with the fact that a managing director is legally obliged to ensure that the company he manages does not infringe competition law. Thus, it would not be unconceivable to consider that a fine imposed on the company for an infringement committed by the managing director is a consequence of a breach of his obligations, and ought therefore to be recoverable. However, the Sehlbach Judgment stresses that cartel fines are personal to the company and cannot be “rolled over” to individuals allegedly involved in the cartel.
At the same time, the Sehlbach Judgment brings Germany in line with other jurisdictions where courts found in the past that cartel fines are not recoverable from company officers/employees. In the UK the Court of Appeal held in Safeway vs. Twigger in 2010 that companies which have been fined by the OFT/CMA for violations of competition law cannot seek to recover that fine from its directors or employees.4 In its reasoning, the Court of Appeal used similar reasons as the Court in Sehlbach to dismiss the damage claims. It held that the principle of ex turpi causa non oritur actio (“from a dishonourable cause an action does not arise”) barred the infringing company from seeking an indemnity from its directors and/or employees. Much emphasis was placed by the Judges on the wording of the Competition Act 1998, which made the fine imposed by the UK competition authorities “personal” to the undertaking in question.
It remains to be seen if the Court’s finding will stand upon fur review by the German Federal Labour Court. The Düsseldorf Higher Labour Court allowed for a further review by the (“Bundesarbeitsgericht”) and Thyssen is widely expected to apply for such a review.
Subject to such a review, the Sehlbach Judgment is groundbreaking in providing legal certainty to both undertakings and their senior management regarding their exposure to damages for cartel fines imposed against the undertaking. At the same time, the exposure to secondary claims by the company for damages the company itself had to pay to its customers for inflated prices resulting from the cartel has not yet been decided by the Court. The Court may come to a different conclusion in this respect, as civil damage claims are not quasi-criminal fines and thus not personal to the undertaking. If such damages will be considered recoverable in general, the Court would need to decide whether a full recovery should be permitted or only up to a certain level (e.g., up to an amount covered by the D&O insurance of up to €1 million – the maximum fine the FCO can impose on individuals).