The recent General Court (GC) judgment, Case T-91/13, LG Electronics, Inc. vs the European Commission, is the nightmare scenario for a company that enters into a joint venture. Imagine owning a 50% share of a joint venture that is caught participating in an illegal cartel. Now you, along with the other 50% shareholder, are held jointly and severally liable for the joint venture’s infringement. Not only that, but when calculating the fine that both of you must pay, the authorities include the direct sales of the cartelized goods plus the sales of the cartelized goods in downstream products. Just when you think that it cannot get any worse, you find out that the other shareholder has been selling 36 times as many downstream products as you, which means that the fine that you are responsible for is significantly larger than if you had just been in the cartel yourself.
In our view, the GC ruling, while fitting within the parameters of the current case-law, is just absurd. Below, we discuss how we got to this point and why we should not stay here.
LG Electronics, Inc. (LGE) and Koninklijke Philips Electronics NV (Philips) decided to create a joint venture whereby they would merge their worldwide cathode ray tubes (CRT) activities into the LG Philips Displays (LPD) group, which would be headed by LG Philips Displays Holding BV. The joint venture took effect as of July 1, 2001. Up until that time, LGE, along with its wholly owned subsidiary in Wales, were responsible for manufacturing and selling LGE’s CRTs.
Philips had 50% of the shares in the joint venture plus one. LGE, through its Welsh subsidiary, had 50% of the shares in the joint venture minus one. While the joint venture was up and running, both Philips and LGE continued to manufacture downstream products separately, such as television sets and computer monitors, which contained CRTs. CRTs for computer monitors are color display tubes (CDTs). CRTs for televisions sets are color picture tubes (CPTs). Unfortunately, the joint venture did not last very long. On January 30, 2006, LPD Holding was declared bankrupt.
- Article 101 TFEU Infringements
In 2012, the European Commission (EC) adopted a decision against a number of manufacturers of CRTs for infringing Article 101 of the Treaty on the Functioning of the European Union (TFEU). It found that they had participated in a CDT cartel and CPT cartel. The manufacturers had fixed prices, shared markets and customers by allocating sales volumes, customers, and market shares, restricted production, exchanged sensitive commercial information, and monitored how well all of the cartel members implemented the collusive agreements.
LGE and Philips were among the CRT manufacturers whom the EC found to have infringed Article 101 TFEU. The EC concluded that LGE had participated in the CDT cartel from October 24, 1996 until January 30, 2006 and that it had participated in the CPT cartel from December 3, 1997 until January 30, 2006. For the period before the CRT business was transferred to the joint venture, LGE and its subsidiaries directly participated in the CDT cartel (October 24, 1996 – June 30, 2001) and CPT cartel (December 3, 1997 – June 30, 2001). For the CDT cartel, LGE was individually fined €116,536,000 and €69,048,000 jointly and severally with Philips. For the CPT cartel, LGE was individually fined €179,061,000 and €322,892,000 jointly and severally with Philips.
- LG Electronics, Inc. vs the European Commission
LGE and Philips filed applications to the GC challenging the EC’s decision. While LGE presented no less than seven pleas in its application, below we look at the GC’s views on:
- The definition of an undertaking and parental liability when it involves a joint venture
- The sales that the EC may take into account when calculating the base amount for fines
- A parent company’s duty of care to maintain files
- Undertakings and Parental Liability in Joint Ventures
We regularly discuss EU competition law’s definition of an “undertaking” and what it means for parent companies. An undertaking is an entity that engages in an economic activity, regardless of its legal status and the way it is financed. It can be made up of one or more natural or legal entities and is personally responsible for any infringement of Article 101 TFEU. Connected to the definition of an undertaking is the principle of parental liability. A subsidiary’s anticompetitive conduct can be imputed to its parent company, even if it has a separate legal entity. This is the case if the subsidiary does not independently decide how it conducts itself in the market but rather carries out the instructions of the parent company. In EU competition law parlance, the parent company exercises “decisive influence” over the subsidiary. In order to determine if a parent company exercises decisive influence over a subsidiary, the EC looks at the economic, organisational, and legal links between the subsidiary and the parent company. If in fact a parent company has decisive influence over a subsidiary, they form a single undertaking and the parent company may be fined for the transgressions of its subsidiary.
Based on relatively recent case-law (see, for example, Case C-172/12 P EI du Pont vs EC), when two (parent) companies each hold 50% of the shares in a joint venture and that joint venture infringes Article 101 TFEU, if the parent companies exercised decisive influence over the joint venture, all three entities can be classified as a single undertaking. As is commonly seen in parent companies’ applications challenging Article 101 TFEU decisions, LGE claimed that it did not exercise decisive influence over the LGD group’s conduct, which would mean that they were not part of the same undertaking and it could not be held personally responsible for the infringement. However, the EC and the GC did not support LGE’s view. Among the reasons the EC held, and the GC confirmed, that LGE exercised decisive influence over LPD:
- LGE and Philips could control how strategic commercial decisions were adopted and supervise the day-to-day management of the joint venture.
- Several members of the joint venture’s supervisory board simultaneously held management positions within Philips and LGE.
- The supervisory board met during the infringement period and discussed inter aliamatters relating to market developments, sales, sales prices, stock volumes and investments in new products.
- The supervisory board took decisions that showed that it influenced how the LPD group operated and was organized. It changed the organizational structure of the group by replacing the group management team with the executive board. It also decided to discontinue managing the group on a regional basis and start using a central management style.
- The LPD group was the preferential supplier of CRT products for both of the parent companies, which meant that LGE had a very specific interest in managing the production/distribution activities in order to take full advantage of the added value created by the vertical integration.
As a result of the overlaps in management and what the EC considered to be a relatively hands-on approach to managing the joint venture, although LGE would disagree, the GC supported the EC’s decision that LGE did exercise decisive influence over the LPD. In Philips’ parallel case, Case T-92/13, Philips vs EC, the GC held that Philips also exercised decisive influence over the LPD group. Thus, the three – LGE, Philips and the LPD group - formed one undertaking, which was personally responsible for the Article 101 TFEU infringement.
Having challenged who should be responsible for paying the fines, LGE then challenged the size of the fines. In order to determine the base amounts of the fines, the EC used two categories of sales: (i) direct EEA sales, which were CRTs that were directly sold to customers in the EEA; and (ii) direct EEA sales through transformed products, which were CRTs incorporated intragroup into final computer monitors and televisions that were subsequently sold to customers in the EEA. With respect to the transformed products, the computer monitors’ and televisions’ total values were not used - only the portion of the total value that corresponded to the value of the cartelized CRTs that were incorporated into the transformed products was (when the products were sold by the undertaking to independent third parties in the EEA). As a result of this approach, CRTs sold by the LPD group to LGE and Philips, who then incorporated them into transformed products and sold them to customers in the EEA, were taken into account.
Why were transformed products taken into account when calculating the fine? The EC and the European courts have taken the position that vertically integrated undertakings may benefit from horizontal price-fixing cartels not only when they sell cartelized products to independent third parties, but also when they sell on the downstream market processed goods that include the cartelized products. There are two ways that the latter can happen: (i) the price increases of the inputs (cartelized products) are passed on in the price of the processed goods or (ii) the infringing undertaking does not pass on the price increase, which gives it a cost advantage over its competitors in the downstream market who do have to buy cartelized products as inputs. Thus, the GC found it perfectly acceptable that the EC included the direct sales of transformed products when it calculated the base amounts for the fines.
So far, the above discussion seems to be supported by the existing case-law of the EU Court of Justice. What comes next is not only astonishing, but also worrying for joint venture participants.
In its decision, the EC calculated the fine imposed on LGE not only on the basis of its own downstream sales in the EEA but also those made by Philips. Unfortunately for LGE, Philips’ sale of CPTs through transformed products to customers in the EEA was 36 times greater than those of LGE. LGE logically argued that only its own sales should have been used to calculate its fine. However, the GC disagreed. Its three-step reasoning was:
- The LPD group and its parent companies belonged to the same undertaking at the time of the infringement. Therefore, they were jointly and severally liable for the entire fine in relation to the anticompetitive activities of the LPD group.
- The EC did not err in including in the calculation of the base amount of the fine the direct EEA sales through transformed products made by the LPD group and its parent companies.
- Therefore, the EC was entitled to hold LGE jointly and severally liable for the direct EEA sales through transformed products by the LPD group even when those sales had been made by Philips.
Therefore, LGE was not going to enjoy any fine reduction on that ground. The GC’s reasoning seems in line with the case-law that has developed over the past five years, but somehow, the outcome just does not seem right. Being held liable for fines that are calculated using downstream sales that are - if we are going to be honest - totally unrelated to your own company and are way beyond your control is quite a stretch. The GC’s reasoning consists of treating LGE’s and Philips’ downstream activities as being part of the same undertaking, as if they were effectively merged. Obviously, that was not the case, and the decision ignored the inherent vertical dimension that underpins parental liability. This leads to the absurd result that LGE and Philips, being part of the same undertaking for the purpose of the fine calculation, should then have been allowed to coordinate their behaviour on the downstream products. In sum, the EC, with the European Courts’ support, continues to inflate the definition of an undertaking as it sees fit, with dramatic repercussions for parent companies – and there does not seem to be any type of end in sight.
- Rights of Defence
The LPD group did not receive the Statement of Objections, the Supplemental Statement of Objections, or the Decision, although the EC informally contacted the LPD group during the proceedings and had exchanges with the liquidator of the group. By failing to bring the LPD group formally into the investigation, LGE argued, its rights of defence had been infringed. Since the LPD group was under the control of a liquidator at the time of the EC’s investigation, LGE did not have access to the documents in the LPD group’s possession. Based on case-law, rights of defence have been infringed when an applicant successfully demonstrates that it would have been better able to ensure its defence if there had been no error, for example, because it would have been able to use for its defence documents to which it had been denied access during the administrative procedure.
Again, the GC disagreed with LGE. The GC said that the inaccessible documents and information did not form part of the file that the EC relied on – since the LPD group was not involved in the proceedings. Therefore, LGE could not claim that the EC prevented LGE from effectively making its views known on the correctness and relevance of the facts and circumstances alleged and on the evidence the EC presented. The GC also pointed out that it did not matter whether the LPD group was in liquidation or even still part of the same undertaking. LGE was liable for LPD’s actions from July 1, 2001 to January 30, 2006 – that is, before it went into liquidation. LGE should have had files from the time when the two worked closely together.
It is on this final point – LGE should have had files from when the two worked closely together – that the undertaking construct again bumps up in a very uncomfortable way with the real world. The GC says that “by virtue of a general duty of care that attaches to all undertakings” LGE was required to properly maintain records, books and files of information detailing its activities (including those of the joint venture) so it could retrieve them if they were ever subject to legal or administrative proceedings. Parent companies need to have at their disposal records that enable them to defend themselves if they are personally implicated as parent companies as part of an undertaking.
This warning makes little sense. Outside of EU competition law there is no such thing as an undertaking. The EC and the European courts made it up. So, how can there be a general duty of care that attaches to undertakings if there is no such thing as an undertaking in, for example, corporate or tax law or generally accepted accounting principles (GAAP)? The GC is creating a new obligation for companies to maintain yet more records on the off-chance that they may find themselves in an Article 101 TFEU investigation.
- Concluding Remarks
This case hits on all of the types of EU competition issues that keep general counsel up at night. It is the quintessential worst case scenario. The GC has held that any time a company is involved in any type of transaction it needs to weigh the possibility that at some point in the future the EC may group the various participants to the transaction together and call them an undertaking. At that point, the company may find itself on the line for a very large fine that is not even related to its own sales.
The company will need to scramble to search its archives to see what information it has kept from the joint venture, shares purchase, etc. praying that there is something meaningful in the file to distance and defend itself. If the EU Court of Justice does not set some serious boundaries, it is an unenviable position to be in, yet one in which more and more companies may find themselves in the future.