In two parallel judgments handed down by the European General Court earlier this week in the Nexans and Prysmian appeals1, the Court has provided welcome guidance on the permissible scope of on-site inspections. It has also reiterated the European Commission’s obligation to stick to the permitted scope of the inspection and avoid a ‘fishing expedition’.
However, in the same judgments, the Court held that disputes over procedural issues occurring during the inspections, such as the questioning of company representatives or the Commission’s approach to removing copies of electronic documents, cannot be challenged before the Court in advance of a final Commission infringement decision unless they produce binding legal effects. The outcome means that those practices can only be challenged before the Court once the Commission issues a final infringement decision, unless the investigated party is willing to risk provoking an earlier Commission decision fining it for obstructing the inspection.
In January 2009, the European Commission (the Commission) carried out surprise inspections at the offices of Nexans and Prysmian in connection with a suspected electrical cable cartel. During the inspections officials took various measures which the companies objected to. These included the taking away of copies of entire hard drives and certain other material, and also the interviewing of an employee. Nexans and Prysmian brought actions before the EU General Court (the Court) challenging:
- the breadth of the Commission’s inspection decision which set out the scope of the inspection; and
- the taking away by the Commission of copies of computer hard drives for review off-site (copies of computer files were placed in sealed envelopes and were later opened and reviewed at the premises of the Commission in the presence of representatives of the companies), as well as the Commission’s on-site questioning of an employee.
The following points emerge from the Court’s judgments.
- Inspections must be precise in scope
The companies argued that the Court should annul the inspection on the ground that the Commission’s mandate was imprecise.
The Court found that the decision setting out the scope of the Commission’s mandate, which referred to ‘electrical cables and associated material’, contained the ‘essential information’ regarding the subject-matter and purpose of the investigation as well as the essential characteristics of the suspected infringement. The Court therefore rejected the argument that the scope of the inspection was ‘overly broad and vague’. However, as explained below, it nevertheless partially annulled the mandate because the Commission could only show that it had the necessary reasonable grounds for suspecting an infringement in the case of high voltage underwater and underground cables, and not other forms of electrical cables.
The judgment emphasises that inspection decisions must be drafted carefully and that any lack of precision will expose the decision to a risk of annulment. This could lead to tighter drafting of inspection decisions by the Commission. In particular, the use of expressions such as ‘amongst others’ and ‘in certain cases’ to describe the products forming part of the subject-matter in an inspection decision was viewed by the Court as ambiguous drafting.
- The Commission cannot undertake a ‘fishing expedition’
The Court also disagreed with the Commission’s view of the scope of a company’s duty to cooperate during an inspection. The Commission argued that its inspection powers extend not only to the specific subject matter of the inspection as set out in the authorisation decision, but also to all other areas of the investigated party’s business. The Court found this interpretation too broad and held that the Commission must limit its inspection to the activities of the company in the sectors indicated in the inspection decision. Otherwise, the Commission would be able to undertake a ‘fishing expedition’, which is ‘incompatible with the protection of the sphere of private activity of legal persons, guaranteed as a fundamental right in a democratic society’.
- The Commission must have ‘reasonable grounds’ to suspect an infringement
The Court stated that it has the power to review whether the Commission had reasonable grounds to adopt an inspection decision. This means that companies can challenge a Commission’s inspection decision at the time, without having to wait for the Commission to complete its investigation. In the light of this judgment, we can expect the Commission, in future, to limit the scope of its inspection mandates more closely to the specific evidence available to it.
In the two cases under appeal, the Court found that the Commission did not have reasonable grounds to adopt an inspection decision in relation to electric cables other than high voltage underwater and underground electric cables. As a result, the inspection decision was partially annulled.
An interesting procedural point arose in that the Court held that it did not have the power to direct the Commission how to comply with its ruling. It remains therefore to be seen whether the Commission will choose to return any of the documents it retrieved from the companies’ offices, which relate to products other than high voltage underwater or underground electric cables. If the Commission does not do so, and later concludes that there is sufficient evidence of an infringement in relation to any of those other products, a question will arise as to whether any infringement decision in respect of those products will be valid, or whether it would be susceptible to representing the ‘fruit of a poisoned tree’.
- Questioning of company representatives must be limited
The Court held that the Commission must limit its questioning of company representatives during on-site inspections, under Council Regulation 1/2003, to information relevant to the specific subject and purpose of the inspection decision.
However, the Court also held that steps taken by the Commission to question employees during an inspection were mere ‘measures implementing the inspection decision’ rather than separately reviewable decisions in their own right. The consequences of this are addressed in the following section.
- No decision on the lawfulness of controversial electronic search practices
The Court refused to consider the legality of certain electronic search practices adopted by the Commission during the on-site inspection – specifically, the Commission’s use of its sealed envelope procedure whereby computer files are copied to a hard disk on-site and placed in a sealed envelope for subsequent review at the premises of the Commission in the presence of company representatives. This is a power that the Commission has claimed to itself since its 2008 ‘explanatory note’ summarising its view of its own dawn raid powers2. The claimed power has been controversial, with some questioning whether the Commission is indeed entitled to remove documents from the inspection site en masse, without first making an assessment in relation to each document of whether or not it falls within the scope of the investigation.
As with the questioning of company representatives, the Court held that procedural acts with respect to the conduct of electronic searches were ‘implementing measures’ and so were not reviewable acts in their own right at this stage of the investigation – unless the contested acts can be shown to produce immediate legal effects, such as in the case of the review of documents protected by legal privilege.
- Limited ability to challenge procedural steps during the inspection
The consequences of the Court’s finding that these procedural steps are not reviewable in their own right, is that they can only be challenged:
- by bringing an appeal against any eventual infringement decision;
- by refusing to submit to the measures during the inspection, which may result in the Commission issuing a fining decision under Article 23(1) of Regulation 1/2003 for obstruction of the inspection; or
- if the measures cause the investigated party to suffer harm, by bringing an action against the Commission for non-contractual liability3.
In addition to being a highly risk alternative, refusing to submit to the measures would not even guarantee companies the possibility of an immediate challenge, since the Commission could decide not to impose a procedural fine at the time, but rather to wait and instead increase the fine imposed in the final infringement decision, on the grounds of obstruction.
In the Nexans and Prysmian cases, we can expect the issue of the legality of the Commission’s practice of copying computer files and interviewing company representatives during an inspection to be subject to review if the ongoing Commission investigation leads to a final infringement decision. In the meantime, the Commission may continue to rely on these practices in future dawn raids. This may result in shorter on-site inspections, as the Commission removes material for later review off-site, and conversely in more drawn-out off-site reviews.
Conclusion: a mixed outcome
The Court’s clarifications with regard to the validity of inspection authorisation decisions are welcome.
However, the Court’s findings with respect to procedural issues that arise on dawn raids reduce the scope for immediate judicial challenge. The judgment highlights the dilemma with which companies are confronted in surprise inspections. If they refuse to submit to the Commission officials’ behaviour during an inspection, companies run the risk of being accused of obstruction and fined for failure to cooperate, or having any final infringement fine uplifted. But if they do not refuse, they must wait until the adoption of a final infringement decision, typically some years later, to challenge the measures taken by the Commission during the initial inspection.
This outcome is unlikely to offer much comfort to companies seeking to object to inappropriate on-site questioning by Commission officials, or to the extensive removal of electronic documents which have not been reviewed by the Commission at the time of their removal.
The net result is that getting the difficult tactical decisions right, as to whether and how to object in the heat of the moment of a dawn raid, has just become even more important.