The Middle Ages are regarded as the golden age of the kin liability (Sippenhaft) in Germany. According to the principle of kin liability, family members had to stand up for the actions of their relatives, regardless of whether they were involved or not. Thus, kin liability was a form of collective liability. A family member was liable even if it had done nothing wrong. This principle was so far unknown to the German law of regulatory offences and law of torts. In these areas of law it was undoubtedly the principle of separation of legal entities (Trennungsprinzip) that ruled. Pursuant to such principle, a legal entity is only liable for such antitrust violations that have been committed by its organs or employees in an attributable manner. Not for more. The 9th GWB-amendment now applies the ax to this basic principle. Is there a relapse into dark medieval times? This blog post is devoted to the question what the new German law has to say on the issue of corporate collective liability in the field of competition law.
Kin liability in German law of regulatory offences
Under previous German law of regulatory offences, a parent company was, in principle, only liable for a cartel offense if it was itself involved in it. Since a legal entity cannot act by itself, the conduct of its organs and senior executives is decisive insofar. Furthermore, the German Federal Cartel Office (Bundeskartellamt) assumed the liability of a parent company in exceptional cases if the parent company had violated its own supervisory duties and did nothing to prevent the implementation of the cartel agreement at its subsidiary (§ 130 OWiG). This practice is, however, still controversial. As a rule, therefore, the fine was limited to the legal body whose organs or members had committed the infringement.
The 9th amendment of the GWB breaks new ground with that respect.
Under new German law, a fine may also be imposed on group companies which have exercised a decisive influence on the company which violated competition laws (§ 81 para. 3a GWB). A parent company can therefore be liable for its subsidiaries.
At first sight this may not sound so dramatic. After all, the parent company must have exercised a decisive influence on the violator. At a second glance, however, the scope of the legislative change becomes clear. To understand this one must turn to the question as to under what circumstances such a determining influence can be assumed. Do the competition authorities have to prove that the parent company has ordered its daughter company to break the laws? Do they at least have to prove that the parent company has in some way exercised its decisive influence in relation to a cartel offense of the daughter company? In principle yes, but a look into the pertinent EU case law quickly strike terror into the hearts of an average German lawyer.
This is because the case law in the EU has developed very far-reaching assumptions with respect to the question of decisive influence. The existence of a decisive influence is presumed at the expense of the parent company in case of 100% daughter companies, of 50% / 50% joint ventures and even of mere minority participations of 30% strengthened by additional management rights. The presumption also extends to the question whether the parent company actually exercised its influence. Formally, all these assumptions can be rebutted. But in reality and in light of the strict requirements rebutting these assumptions comes close to a mission impossible. As far as can be seen, there is not a single case in which the European courts have accepted that the presumption is rebutted. The rebuttal is thus something like the “Flying Dutchman” of competition law: all claim that it exists, but no one has ever seen it in real live.
Liability in case of company succession
But there is more. The German legislator also closed the notorious so-called “sausage gap” (Wurstlücke) in the 9th GWB amendment. The term “sausage gap” refers to the possibility of avoiding a cartel fine by way of company restructuring. The German sausages manufacturer Tönnies successfully did this in the sausage cartel case, of course very much to the displeasure of the German Federal Cartel Office. The “sausage gap” was a result of the fact that the German Federal Supreme Court (BGH) assumed liability of a company that had legally or factually taken over the cartel business only in the narrowly confined cases of an economic “near identity”.
This is repealed by the new German law. In the event of a complete or partial succession of the cartel business, the fine may also be imposed on the legal successor (Section 81 para 3b GWB). The same applies to cases of so-called economic continuity, that is, if the carrying assets of the cartel business are transferred to another legal entity that carries on the business (§ 81 para. 3c GWB).
Doubts about constitutional compliance
With the 9th amendment of the GWB, the German legislator takes over the principle of “undertaking” as an economic unit from EU competition law into German competition law. However, considerable constitutional concerns have already been raised with that respect. In particular, a legal opinion mandated by the Federation of German Industry (BDI) comes to the conclusion that the new rules are in breach of various constitutional guarantees. It argues that the liability of parent companies is contrary to the principle of personal liability because parent companies are usually not responsible for cartel offences by their daughter companies. Other voices argue that the principle of personal liability applies to legal entities only to a very limited extent. The new group liability, it is argued, is acceptable and is within the discretion of the legislator. Yet others voice even go so far to argue that the German legislator had no choice as to implement group liability into German law in order to secure the practical effect (so-called effet utiles) of EU competition law. The closure of the “sausage gap” is again criticized as not sufficiently transparent and disproportionate. In particular, it is unclear when economic continuity exists and when not.
Group liability also in cartel damage claims?
What about cartel damages claims? Are parent companies also liable for cartel infringements by their subsidiaries in private enforcement? Can an injured party also sue the generally solvent parent companies?
The answer to this question is not an easy one. In remarkable contrast to the area of cartel fines, the legislator stayed silent on the question of group liability in cartel damage claims. According to the wording of the new German law, the “person” who committed the cartel offence is obliged to pay damages (Section 33a (1) GWB). By contrast, the EU damage action directive speaks at this point of the “undertaking” that has committed a cartel offense. The German legislator is different. He uses the undefined pronoun “who”. But who is this “who”?
Some argue that the answer to this question lies in the EU damage action directive. The directive refers to “undertakings”. And according to the clear case-law of the EU courts, “undertaking” is not the legal entity, but the economic entity, which may include several legal entities. If the undertaking is liable, all legal entities belonging to that economic entity shall be jointly and severally liable. Accordingly, the new German law should be interpreted as complying with the directive in such a way that parent companies are also jointly and severally liable for the infringements of their respective subsidiaries.
Other voices argue that the directive does not necessarily require the member states to introduce a group liability of all legal entities of an economic entity. If this had been the intention of the EU legislator, the directive would have had to impose such a group liability clearly and unequivocally. It does not do so, however. The directive merely uses the term “undertaking”. The fact that the German legislator, being fully aware of the issue, left open whether group liability is implemented into German law could be interpreted as “eloquent silence” against this background.
It is up to the courts
The triumphal return of the kin liability into German law is, therefore, by no means a settled matter. Constitutional compliance concerns are raised against group liability in the field of antitrust fines. As to cartel damage claims, the German legislator has left the question undecided in its entirety. There will be a lot of work on the German courts. Things certainly remain exciting!
The next post from our blog series on the German Competition Act reform “Mind the gap! – New Size-of-Transaction Test in German merger control” will be published tomorrow.