On November 18 2014 the Federal Court of Justice addressed the issue of responsibility for a cartel fine imposed on several companies by the European Commission. The court overruled a judgment in which the Munich Higher Regional Court had found that a parent company was internally responsible for a fine imposed jointly on it and its (former) subsidiaries. Effectively, it would be the parent companies which benefited from profits generated through the subsidiaries' participation in the cartel. The Munich Higher Regional Court must now decide on the parent company's regress claim, applying the general principles of joint liability under German civil law.
On July 22 2009 the European Commission imposed fines totalling €61.1 million on members of the calcium carbide cartel. SKW Stahl-Metallurgie GmbH, which participated in the cartel, received a €3.3 million fine, for which its parent entity Arques Beteiligungsgesellschaft mbH and its then ultimate parent entity Arques AG were held jointly and severally liable because they formed a single economic unit with SKW Stahl-Metallurgie GmbH. All three companies contested the decision before the General Court (Cases T-395/09 and T-384/09) and the fine was reduced by €1 million.
Arques AG later sold its shares in Arques Beteiligungsgesellschaft and Arques Beteiligungsgesellschaft was renamed SKW Stahl-Metallurgie Holding AG.
The now independent SKW Stahl-Metallurgie GmbH and SKW Stahl-Metallurgie Holding AG appealed to the European Court of Justice (ECJ) (Case C-154/14, case still pending).
Arques AG did not appeal. The fine decision became final and binding on the former parent entity. The commission fined Arques AG approximately €6.8 million and SKW Stahl-Metallurgie GmbH and SKW Stahl-Metallurgie Holding AG provided a bank guarantee to the same amount.
Arques AG paid the fine accordingly and is now claiming €6.8 million in regress from SKW Stahl-Metallurgie GmbH and SKW Stahl-Metallurgie Holding AG before the civil courts. It argues that despite the European concept of a single economic unit, a parent entity which was not involved in anti-competitive conduct should be able to recover internally the fines paid to this effect for one of its (former) subsidiaries.
Under German law, compensation between joint and several debtors is regulated by Section 426 of the Civil Code, which stipulates that joint and several debtors are obliged equally in relation to one another unless otherwise determined. The provision should be understood so that the general rule of equal proportion applies only if no other division ratio exists. Another division ratio can be:
- derived from an agreement;
- derived from other legal relations between the joint and several debtors; or
- established on equitable grounds.
Both the Munich Regional Court and the Munich Higher Regional Court dismissed Arques AG's claim against SKW Stahl-Metallurgie GmbH and SKW Stahl-Metallurgie Holding AG.
Both courts relied on Section 426 and held that it was not decisive which of the three companies held jointly and severally liable by the commission had actually engaged in the anti-competitive conduct. The courts took the view that the company which had (potentially) benefited from the cartel revenues should be liable for the cartel fine. The courts further considered that it could be assumed that benefits from the infringement had gone to Arques AG as the ultimate parent company of the cartellist SKW Stahl-Metallurgie GmbH (at least among the three companies), and that consequently Arques AG was fully liable.
In its November 18 2014 decision the Federal Court of Justice quashed the judgment of the Munich Higher Regional Court, which must decide the case afresh according to the general principles set out by the Federal Court.
In line with recent ECJ case law (C-231/11 P – Siemens Austria), the Federal Court confirmed the lower-instance judgment where the Munich court held that internal compensation between joint and several debtors is subject to German law, particularly Section 426 of the Civil Code. However, the Federal Court found that the Munich court had erred in law when it looked only at the (potential) beneficiary of the anti-competitive conduct.
According to the Federal Court, in order to establish internal liability it must first be assessed whether there is a contractual arrangement which stipulates rules of compensation. Claims by a parent company, for example, can be barred if a profit transfer agreement has been concluded between the parent company and its subsidiaries. Without such a contract, the proportion of internal liability should be established by considering the following criteria:
- The degree of contribution of each joint and several debtor to the infringement – the fine amount is determined according to the gravity and duration of the infringement and these aspects should therefore also be reflected in the proportion of internal compensation. The fact that the commission need not prove the parent company's participation in the infringement concerns only external liability; for internal compensation, the national courts must determine all relevant circumstances (ie, the extent of the parent company's contribution to the infringement).
- The nature of infringement of each joint and several debtor – the court pointed out that a mere violation of organisational and supervisory duties is considered less severe than actively committed competition law infringement.
- The economic benefit of the cartel generated by each joint and several debtor – this is of particular importance in cases where the commission has ordered the skimming of illegally obtained profits. However, it is also relevant in general when the revenue of a cartel must be considered, since the proper allocation of profits in case of compensation claims by a joint and several debtor supports the deterrent effect of cartel fines.
- The economic capability of each joint and several debtor – in this context, the court held that the upper fine limit of 10% of the undertaking's turnover is applicable to each joint and several debtor when determining the amount of internal compensation. In order to ensure that a fine's deterrent effect is not threatened, as well as the 10% threshold, the fine amount should reflect the size of the undertakings, the value of goods concerned and the threat that infringements of that type pose to EU objectives.
- The turnover relevant to the offence of each joint and several debtor – a joint and several debtor which has generated only low turnover with the product subject to the cartel should not be unreasonably burdened by a duty for internal compensation.
The court pointed out that the fact that a parent company can claim compensation from its subsidiary is not contrary to a fine's purpose. Regardless of the internal responsibility of the fine, the parent company remains fully liable in relation to the commission, so there is little sense in outsourcing cartel activities to a financially weak subsidiary. Further, the court underlined that a parent company cannot avoid liability for a cartel by selling the infringing subsidiary. A potential compensation payment will be reflected in the purchase price – or, if the parent company had maliciously concealed the payment obligation, the buyer is sufficiently protected by its rights under the Civil Code.
The case has been referred back to the Munich Higher Regional Court for further deliberation.
In light of the increasing duration of EU cartel proceedings before the commission and the court, this decision does not concern an isolated case. It can be expected that in future, the situation where a parent company held jointly and severally liable with its subsidiaries sells off the acting subsidiary before the fine decision becomes legally binding will become increasingly common. Thus, national courts will face more and more internal compensation claims brought forward by previously related companies.
While the Federal Court of Justice specified the criteria relevant to the proportion of internal compensation between joint and several debtors, it appears that the decision will provide only limited guidance – the application of these criteria in a particular case will remain complex and leave much discretion to the ruling courts. However, the judgment clearly opens the door for (former) parent entities wanting to claim back fines that they have had to pay for their subsidiaries.
Consequently, potential buyers of an entity involved in a cartel should attribute particular importance to the fact that the target company post-transaction might also be exposed to internal compensation claims by a former parent company and should take necessary precautions.
For further information on this topic please contact Benedikt Ecker at CMS Hasche Sigle by telephone (+32 2 6500 420), fax (+32 2 6500 422) or email (firstname.lastname@example.org). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.
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