On 21 July 2016, the European Court of Justice (the “Court”) delivered a judgment in VM Remonts case (C-542/14), in response to a preliminary reference made by the Latvian Supreme Court (Latvijas Republikas Augstākā tiesa) in which the Court spelled out conditions for liability which may arise out of an external service provider’s actions breaching Article 101 of the Treaty on the Functioning of the European Union (“TFEU”).

In short, the Court decided that under Article 101 TFEU an undertaking may be held liable for an anti-competitive conduct of an external service provider hired by it only if one of the following conditions is met:

  • the service provider was in fact acting under the direction or control of the undertaking concerned; or
  • that undertaking was aware of the anti-competitive objectives pursued by its competitors and the service provider and intended to contribute to them by its own conduct; or
  • that undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the service provider and was prepared to accept the risk which that entailed.

Background

This case emanated from the Latvian Competition Council’s (Latvijas Republikas Konkurences padome) (the “Council”) decision taken in October 2011(Case No. p/11/03.01.-01./1) condemning and fining three Latvian companies - SIA VM Remonts, previously SIA DIV un Ko (“VM Remonts”), SIA Ausma grupa (“Ausma”) and SIA Pārtikas Kompānija (“Pārtikas Kompānija”) - for engaging in a bid-rigging concerted practice. That decision was taken under Section 11(1) of Latvian Law on Competition of 2001, as amended, which provides for a legal framework that is in substance identical to that laid down in Article 101(1) TFEU.

All three companies responded to a call for tenders announced by the Municipal Council of the Latvian City of Jūrmala for food supply to local educational establishments. Pārtikas Kompānija had independently prepared the draft tender but had instructed another company providing legal services to prepare a formal tender and submit it on its behalf. That company had, in turn, engaged a Sub-Contractor - SIA MMD lietas (“the Sub-Contractor”) to fulfill this task and handed over to it the draft tender prepared by Pārtikas Kompānija. Without the knowledge of Pārtikas Kompānija the Sub-Contractor in parallel had also undertaken to prepare the tenders of VM Remonts and Ausma for the same tender procedure.

An employee of the Sub-Contractor working on all three bids used the price information received from Pārtikas Kompānija as a point of reference in preparing the the bids of VM Remonts and Ausma and in that way the three bids were co-ordinated (namely Ausma’s tender was approx. 5% lower than the Pārtikas Kompānija’s tender and VM Remonts’ tender was approx. 5% lower than Ausma’s tender). The Council found that the three tendering companies prepared their tenders jointly with the aim of creating the impression that there was actual competition between them.

All three tendering companies appealed the Council’s decision to the Regional Administrative Court (Administratīvā apgabaltiesa) which in July 2013 upheld the Council’s decision in respect of VM Remonts and Ausma but annulled it in so far as it related to finding of an infringement on the part of Pārtikas Kompānija. The basis for such an annulment was the lack of evidence showing that the senior management of Pārtikas Kompānija had any knowledge of or had authorized the Sub-Contractor’s actions. The Council, VM Remonts and Ausma appealed this judgment on points of law to the Latvian Supreme Court.

The question referred to the Court

Against this background the Latvian Supreme Court asked the Court, in essence, whether Article 101(1) TFEU must be interpreted as meaning that an undertaking may be held liable for a concerted practice on account of the acts of an independent service provider supplying it with services.

The Court’s judgment

Jurisdiction

The Court started with the issue of jurisdiction to hear this case as the proceedings before the Latvian Court were based on Section 11(1) of Latvian Law on Competition of 2001 and not Article 101(1) TFEU. The Court’s conclusion here was that since the Latvian Law provision was modeled after Article 101(1) TFEU the Court was entitled to answer the question posed to it.

Substance

Then the Court turned to the substance of the matter. According to the Court a principal distinction must be drawn between the attribution of liability to an undertaking for the anti-competitive acts of its employees, on the one hand and the external service providers engaged by it, on the other hand. Such distinction stems from the notion of “undertaking” which in EU Competition Law means a single economic unit even if in law that economic unit consists of several persons (natural or legal).

The Court emphasized that unlike the employees who perform their duties for and under the direction of the undertaking for which they work and thus are considered to be incorporated into the economic unit comprised by that undertaking, an external service provider which independently provides services in return for a payment must for the purposes of applying Competition Law rules be regarded as a separate undertaking from those to which it provides services and therefore, the acts of such a service provider cannot automatically be attributed to the undertaking which has engaged it.

As a result, the Court concluded that in this context the relationship between an undertaking and its employees is not, in principle, comparable to the relationship between that undertaking and the external service providers. On that basis the Court distinguished between its case-law on attribution of liability for the anti-competitive conduct of undertaking’s employees referred to in the preliminary reference made by the Latvian Supreme Court (viz. Musique Diffusion française case (100/80 to 103/80) and Slovenská sporiteľňa case (C-68/12)) and the factual situation in this case.

The Court then listed three factual scenarios in which anti-competitive conduct of external service provider could nonetheless be attributed to an undertaking which has engaged it and thus such an undertaking held liable under EU Competition Law rules:

  • First, that may be the case where the service provider, although presenting itself to the public as independent, is not in fact genuinely independent from the undertaking concerned and actually acts under the direction or control of that undertaking. For example, that would be the case where the service provider has only little or no autonomy or flexibility in respect of the way in which the particular activity is to be carried out and where its notional independence in fact disguised an employment relationship. According to the Court the lack of independence may be inferred from particular organizational, economic and legal links between the service provider and the undertaking concerned.
  • Secondly, even where the service provider is actually genuinely independent from the undertaking engaging it, that undertaking may still be held liable if it was aware of the anti-competitive objectives pursued by its competitors and the service provider and it intended to contribute to them by its own conduct. According to the Court, this condition is met where the undertaking concerned intended via the intermediary of its service provider to disclose commercially sensitive information to its competitors or where it expressly or tacitly consented to such sharing of that information. On the other hand, the Court clearly stated that this condition is not met where the service provider uses the undertaking’s commercially sensitive information for completion of the competitors’ tenders without the undertaking’s knowledge, as in the present case.
  • Thirdly, the liability may arise where that undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the genuinely independent service provider engaged by it and if it was prepared to accept the risk which that entailed.

The Court explained that it is the task of the National Courts to establish whether in particular circumstances one of the above-mentioned conditions is met.

Comment

Businesses engaging external service providers should certainly take note of this case and make sure that selection of their sub-contractors to which their commercially sensitive information is disclosed is done carefully with the conditions listed by the Court in mind.

It is important to point out that the Court’s interpretation of Article 101 TFEU given in this case, is significantly narrower if compared to a more wider approach regarding potential liability for an external service provider’s conduct recommended by Advocate General (AG) Wathelet, in his opinion in this case delivered in December of 2015. AG Wathelet proposed introduction of a brand new rebuttable presumption of liability for anti-competitive conduct of the third party service providers which would apply broadly, inter alia, regardless of whether the undertaking was even aware of said conduct and thus significantly extending the reach of EU Competition Law rules.

Such an approach could have raised a number of serious concerns and potential liability for all businesses that engage external service providers in the principles of personal liability and individual nature of penalties in the field of Competition Law.

The Court’s approach is more balanced and less radical. Of course the actual scope of these conditions in practice will heavily depend on the National Courts, as theywill primarily apply the conditions spelled out by the Court in this case.