In-house lawyers need to imagine this. The company’s preventative competition law compliance programme has failed to prevent a serious infringement. Former co-conspirators have beaten you in the race to obtain immunity by using leniency applications. Years of disruptive and intrusive investigations by competition law enforcement authorities have culminated in the imposition of a heavy financial penalty. Management in this position needs to decide whether it is time to move on or whether the company should prolong the pain by appealing the regulator’s decision.
Not that long ago, competition authorities such as the European Commission (the “Commission”) and the UK’s Office of Fair Trading (the “OFT”) would - often after years of painstaking investigations - impose fines which were low relative to the size of the companies (and the profits made from the anti-competitive conduct). As a result, most fined companies did not bother appealing. That has changed, to the point that 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 keen to ensure that their twin objectives of punishment and deterrence are met. A fine which does not impose a financial penalty greater than the supracompetitive profits made by infringing parties cannot be effective. Hence, the hike in fines in recent times: by way of example, total fines imposed by the Commission for cartel activity between 1990 and 1999 amounted to approx. €833 million. In the following decade fines exceeded €13.1 billion - an increase of approx. 1,475%. This trend is continuing to accelerate with fines in 2010 and 2011 approaching €3.2 billion.
With this backdrop, it is no surprise that appeals are on the increase. In addition, 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, this is a one-way street: fines are either upheld or decreased. This is due to the simple fact that 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 considered appropriate themselves.
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 firstly determine the “base level” of the fine and then apply a multiplier to take account of aggravating factors such as the length of the infringement, its gravity, recidivism, etc. The subjective assessment inherent in many multipliers make them ripe for appeals. Take out (or decrease) the multiplier and fines can shrink dramatically.
A recent example of successful court action of this type in the UK are the appeals against the OFT’s 2009 decision to impose fines of £129.2 million on 103 construction companies. Twenty-five companies filed appeals with the majority relating only to the fining methodology used by the OFT. Earlier this year, the Competition Appeal Tribunal (the “CAT”) handed down a series of judgments which significantly reduced the fines imposed, in some cases by up to 90%. The CAT sharply criticised a number of aspects of 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 outlaw the use of the mechanism outright but held that the OFT had - in breach of its own guidelines - failed to assess each company individually and tailor the fine to ensure that it was necessary and proportionate to punish the particular company for the specific infringement and deter it and others from further breaches. Ironically, the OFT’s rationale for using a mechanistic assessment - in addition to managing the significant workload of dealing with over 100 companies - was to avoid allegations of inconsistency and discrimination on appeal to the CAT.
An example at the European level of the need to take account of the specific circumstances of each company when it comes to setting fines is the judgment of the General Court in the appeals relating to the gas insulated switchgear cartel. In 2007, the Commission imposed fines exceeding €750 million on 20 companies. It decided that the fines of three of the companies would be increased by 50% due to the fact that had at various times acted as “European secretaries” to the cartel. The court did not consider that such an uplift was inappropriate in itself. It did, however, chastise the Commission for applying the same uplift to all three companies despite the fact that two of them had fulfilled this function for much shorter periods of time. Accordingly, the court reduced to uplift applied to two companies to 20% and 35% respectively.
In a separate appeal relating to the same cartel, the court this month annulled the fines of two other companies which had exceeded €200 million - not because they did not participate in the cartel but 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 is 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 it as a repeat offender. As a result, the court reduced the fine imposed by €160 million.
In summary, anti-competitive conduct is clearly becoming more expensive for those that get caught. However, as the above examples show, the flipside for competition authorities is that appeals have become much more profitable. And not just for the lawyers. It is true that litigation is a lengthy, expensive and uncertain business, in particular in front of the EU’s courts. However, with fines frequently exceeding €100 million, even relatively small percentage reductions gained on appeal will more than pay the costs of the appeal. As a result, we are now seeing many appeals which focus on the level and method of fine setting rather than the culpability of the companies involved. This trend will undoubtedly continue.