With its judgement dated 29 May 2017, the Regional Court in Brno cancelled the record penalty of CZK 1,659,993,000 that the Competition Office (the “Office”) imposed in 2016 for an alleged large construction cartel. This occurred on procedural grounds insofar as the court stated that the Office had repeatedly exceeded its powers during dawn raids, the result of which is the illegal nature of such gathered evidence on which the Office based its entire case. In this article, we briefly discuss the background of the case and the reasons that prompted the court to cancel the Office’s decision. We also comment on the importance of the judgement for the future.
SUMMARY OF THE CASE
The Office opened administrative proceedings with two construction companies in the summer of 2012 based on an anonymous complaint forwarded by the Police. The complaint identified three public contracts of one contracting authority, and the anonymous party suspected two companies of anti-competitive conduct (coordination of a tender procedure, i.e. bid rigging). Based on the complaint, the Office conducted dawn raids in the business premises of both companies and subsequently launched administrative proceedings against them.
The subject matter of the administrative proceedings (in the notice on commencing administrative proceedings) as well as the objective of the dawn raids (in the authorisation to conduct the dawn raid) was defined as “concerted practices and/or agreement between the parties to the administrative proceedings involving coordination of the participation and bids in tender procedures relating to construction, especially in the tender procedures organised by public contracting authorities in the Czech Republic for construction work in the area of civil engineering during 2011 and 2012”.
With respect to the three mentioned contracts, the Office did not manage to verify the suspicion during its first two dawn raids, not even based on further investigation. However, during these dawn raids the Office searched for and seized many materials relating to public contracts that were completely different from the three indicated in the complaint and with completely different contracting authorities.
Hence, based on the discovered information, the Office gradually extended the group of parties to the proceedings to 15, and also carried out additional onsite inspections for most of them. Nevertheless, it kept the original definition of the subject matter of the proceedings for the entire time and also conducted dawn raids with this described purpose. It was only in 2014 (i.e. after all of the dawn raids) that the Office clarified the subject matter of the administrative proceedings in such a way that it specified the public contracts for which it had suspicions of illegal conduct. These contracts did not have anything in common with the original complaint. They did not even relate to the same group of participants, and most of them did not even take place during 2011 and 2012.
On 6 November 2015, the Office issued a first-instance decision in which it imposed a penalty exceeding a total of CZK 2 billion (approx. EUR 80 million) on 11 parties to the administrative proceedings (in 2014, a certain part of the public contracts were assigned to independent proceedings, which also related to narrowing down the group of parties to the proceedings). Seven of the parties to the proceedings filed an appeal against the decision. The chair of the Office decided on 8 February 2016 that it would reduce the penalty to a total of CZK 1,659,993,000 (approx. EUR 66.400.000). It rejected the remainder of the appeal and confirmed the first-instance decision. All of the parties to the proceedings that filed the appeal subsequently defended themselves by filing an action against the decision at the Regional Court in Brno.
JUDGEMENT OF THE REGIONAL COURT AND THE GROUNDS FOR RESCINDING THE PENALTY
The Regional Court canceled the Office’s decision based on procedural errors. This concerned the correctness of the definition of the subject matter of the administrative proceedings and the legality of the dawn raids.
Incorrect definition of the subject matter of the administrative proceedings
The Regional Court stated in relation to the definition of the subject matter of the proceedings that the administrative authority may not commence proceedings for an administrative offence at any time, but only if it has justified suspicion regarding the illegal nature of specific conduct. According to the court, although the Office had this justified suspicion, it was only in relation to the three public contracts from 2012 identified in the anonymous complaint that was made at the beginning of the investigation.
Thus, if the Office proceeded with formal administrative proceedings based on an assessment of the anonymous filing and the suspicion arising from it (no other material was contained in the administrative file), then according to the Regional Court, it was its obligation to define the subject matter of the proceedings in a sufficiently concrete manner with a connection to the suspicion, i.e. with a connection to the three public contracts as specific facts that should relate to the proceedings. However, this did not occur in the case at hand. The court noted that, in the key documents, the conduct was “defined with almost no individual characteristics – only the construction industry”, and that “the essentially boundless and all-encompassing definition” cannot be accepted. As a result, the court also concluded that the description of the illegal conduct was too general and vague for the definition of the subject matter of the proceedings and did not correspond to the specific suspicion for which the proceedings were launched. In the court’s opinion, the Office did not define the facts for which the proceedings should have been conducted, thus violating a wide range of basic procedural principles (among others, the right to defence).
Illegal nature of the dawn raids
The Regional Court came to the same conclusion in relation to the manner of defining the purpose of the dawn raids. Even in this case, the Office did not maintain the connection to the specific suspicion, thus the scope of authority for dawn raids was unreasonably broad. In the Regional Court’s opinion, the Office’s approach should, therefore, be considered as prohibited “fishing expeditions”, i.e. an information search that is not legal.
With reference to the judgement of the ECHR in the case of Delta Pekárna, the court pointed out that, under the democratic rule of law, dawn raids (as investigative powers grossly interfering with the rights and freedoms of competitors) must meet the following criteria: legal framework, legitimate objective, and proportionality. Although the test of the legal framework and the legitimate objective in the court’s opinion would be met in the case of a large construction cartel, this does not apply in relation to proportionality, which must be investigated from the standpoint of the criteria of (i) adequacy (justification), (ii) duration of the investigation, and (iii) scope. The actual scope of the first two investigations was outside the permissible framework (the Office should limit it only to the three public contracts contained in the complaint). In addition, after it was determined that the suspicion was not confirmed for these contracts, the entire administrative proceedings should have been discontinued. If, on the contrary, it continued with additional follow-on dawn raids, then the adequacy of them (in addition to the scope) could also be seriously doubted since the reason for conducting the other investigations was not provided at all.
The Regional Court did not exclude that the Office could accidentally (though not systematically) find a document during a dawn raid that does not relate to the original suspicion. However, in such a case, it should have launched new administrative proceedings with a corresponding subject matter and conduct any additional investigation of this matter as a part of these proceedings.
Thus, all of the dawn raids were illegal (they did not meet the test of proportionality or the “delta test”). 1 According to the court, all of the evidence gathered during the dawn raids was, therefore, also illegal, and thus cannot be further used in administrative proceedings.
By a judgement of the Regional Court, the case was returned to the chair of the Office for further proceedings; thus, the penalty does not apply, and an enforceable decision does not exist. The Office is obliged to comply with the legal opinion of the Regional Court set out in the judgement when holding additional proceedings.
On the day after its delivery, the Office filed an appeal against the judgement (which does not have a suspensory effect). Hence, the Supreme Administrative Court will have the final say in this case.
COMMENTS BY ROBERT NERUDA
We welcome the judgement of the Regional Court in Brno, and frankly speaking, we believed in it. We, together with our clients, have for many years questioned the Office’s approach in various administrative and court proceedings, including those referred to in this article. We repeatedly refer to the fact that the Office uses a sort of “blanket” authority allowing it to investigate practically all business records of companies over an unlimited period of time. This prevents these companies from identifying the scope of their required cooperation and exercising their right to defence, including effective options for objecting to the Office’s excessive approach. We believe that the judgement of the Regional Court will lead to a change in this practice of the Office.