In-house lawyers need to imagine the following hypothetical: Presume that the company’s preventative antitrust law compliance program in Europe has failed to prevent a serious violation. Former co-conspirators have beaten the company in the race to obtain immunity by negotiating a leniency application. Years of disruptive and intrusive investigations by the European Commission (the “Commission”) has culminated in the imposition of a heavy financial penalty. Management needs to decide whether it is time to move on or whether the company should prolong the pain by appealing the Commission’s decision.
Not that long ago, European competition authorities, such as the Commission and the UK’s Office of Fair Trading (OFT), would often, after years of painstaking investigations, impose fines that were small relative to the size of the company involved (and the profits made from the alleged anticompetitive conduct). As a result, most fined companies did not bother appealing. That has now changed, and it is now unusual for a company subject to a finding of anticompetitive conduct not to take its chances in court.
The single biggest driver of the increase in litigation of this type has been the exponential rise in the level of financial penalties imposed by competition authorities seeking to ensure that their twin objectives of punishment and deterrence are met. A fine that does not impose a financial penalty greater than the supra-competitive profits made by a defendant cannot be effective. Hence, fines have increased dramatically in recent times. By way of example, total fines imposed by the Commission for cartel activity between 1990 and 1999 amounted to approximately €833 million. In the following decade, total fines exceeded €13.1 billion -- an increase of approximately 1,475%. This trend continues to accelerate, with fines in 2010 and 2011 approaching €3.2 billion.
Based on this information, it should be no surprise that appeals are on the increase. Moreover, there seems to be little risk attached to appealing a large fine. In theory, the court could decide to increase, as well as decrease, such fines. In practice, however, it has been a one-way street: fines have either been upheld or decreased. This is because a court will usually limit itself to examining the arguments placed in front of it by the parties. The appellant will invariably argue that the fine should be annulled or reduced. Competition authorities will defend their decisions vigorously. They will ordinarily not, however, ask the court to impose higher fines than they themselves considered appropriate.
The precise strategy of companies appealing antitrust fines naturally differs, and is highly dependent on the facts of each case. However, a relatively recent development in the fining methodology used by competition authorities has provided companies with low-hanging targets. Many authorities now use so-called multipliers when setting the level of fines. The authority will first determine the “base level” of the fine, and then will apply a multiplier to take account of aggravating factors, such as the duration of the violation, its gravity, recidivism, etc. The subjective assessment inherent in many multipliers makes them ripe for appeal. Take out (or decrease) the multiplier and fines can shrink dramatically.
A recent example of successful court action of this type in the UK were the appeals from the OFT’s 2009 decision to impose fines of £129.2 million on 103 construction companies. Twenty-five companies filed appeals, with most relating only to the fining methodology used by the OFT. Earlier this year, the Competition Appeal Tribunal (CAT) handed down a series of judgments that significantly reduced the fines, in some cases by up to 90%. The CAT sharply criticized a number of factors in the OFT’s fine calculation. The most significant reduction resulted from the CAT’s rejection of a mechanistic application of a multiplier intended to increase the fines to a “Minimum Deterrence Threshold” (which had in some cases increased the base fine by up to 600%). The CAT did not prohibit the use of this mechanism outright, but held that the OFT had (in breach of its own guidelines) failed to:
- assess each company individually;
- tailor the fine to ensure that it was necessary and proportionate to punish the particular company for the specific violation;
- deter it and others from further breaches.
Ironically, the OFT’s rationale for using a mechanistic assessment, in addition to managing the significant workload involved in dealing with over 100 companies, was to avoid allegations of inconsistency and discrimination on appeal to the CAT.
An example at the European Commission level of the need to take into account the specific circumstances of each defendant when it comes to setting fines was the judgment of the General Court in the appeals relating to the gas insulated switchgear cartel. In 2007, the Commission imposed fines on 20 companies exceeding a total of €750 million. It decided that the fines imposed on three of the companies would be increased by 50% due to the fact that they had at various times acted as “European secretaries” to the cartel. The court did not agree that such an increase was inappropriate in itself. It did, however, criticize the Commission for applying the same increase to all three companies despite the fact that two of them had acted in the applicable capacity for much shorter periods of time. Accordingly, the court reduced the fines on the two companies by 20% and 35% respectively.
In a separate appeal relating to the same cartel, the court more recently annulled the fines of two other companies which had exceeded €200 million because the Commission had discriminated against them by using a different base year for its fine calculation. It remains to be seen whether the Commission will adopt amended fines when it re-decides the cases.
A further example was the General Court’s recent judgment in the cases arising out of the Commission’s decision in 2007 to impose fines exceeding €992 million on a number of companies for operating a cartel in the market for elevators and escalators. The court held that the Commission had unlawfully increased one company’s fine by 50% because it incorrectly classified the company as a repeat offender. As a result, the court reduced the fine imposed on that company by €160 million.
In summary, anticompetitive conduct is clearly becoming more expensive for companies found to have participated in a cartel. However, as the above examples show, the flipside for the European antitrust authorities is that appeals have become much more prevalent. It is true that investigations, litigation, and appeals can be a lengthy, expensive, and uncertain business. However, with fines frequently exceeding €100 million, even relatively small percentage reductions gained on appeal can make an appeal worthwhile. As a result, there are now many appeals that focus on the level and method of fine setting rather than on the culpability of the companies involved. This trend will undoubtedly continue.