When the worst happens and a company is found to have been implicated in a potential cartel, its first question is: "How much is the fine?" The answer to that question just became more difficult following InnoLux Corp v European Commission. The European Court of Justice (ECJ) confirmed the European Commission's wide discretion in working out the value of sales on which the fine is to be calculated. In theory, the value of sales should be simple. Previously, the value of the cartelised product sold in the European Economic Area (EEA) was determined, then the percentage base fine was calculated from that (by applying a 15% to 30% range, largely weighted towards the lower end of the scale, but depending on seriousness). The orthodoxy was that internal consumption of the cartelised product was excluded from that calculation, since a company was unlikely to sell to itself at a cartelised price.
However, in InnoLux, the commission controversially took into account not just sales of the cartelised product, but also the company's inter-divisional sales (ie, internal incorporation of the cartelised components outside the EEA into finished products then sold into the European Union). The case thus significantly raised the stakes for vertically integrated companies.
On December 8 2010 the European Commission published a decision imposing fines of €650 million on six Korean and Taiwanese producers for their participation in a cartel concerning liquid-crystal display (LCD) panels. The LCD panels in question were manufactured in Taiwan, then transformed by InnoLux subsidiaries into final products such as televisions and notebook computers before being sold to customers in the EEA. InnoLux was initially fined €300 million, one of the larger fines in the case.
The commission's fining guidelines state that in determining the basic amount of a fine, it should take into account the value of the sales of goods directly or indirectly relating to the infringement within the EEA. In calculating the value of sales in the LCD panel case, the commission identified three types of sales:
direct EEA sales (ie, sales of cartelised components from one EEA undertaking to another);
direct EEA sales through transformed products (ie, sales of cartelised components that were transformed into finished products outside the EEA by companies within the producer's group and then sold to a third-party undertaking within the EEA); and
indirect sales (ie, sales of cartelised components from the producer to a third-party undertaking outside the EEA which were then sold by that third-party undertaking into the EEA).
The first category is non-controversial. The second category is somewhat controversial and was the category at issue in this case. The third category is very controversial, but was not considered in this decision, as the commission considered the resulting fine to be sufficient deterrent without needing to include sales from the third category in its calculation.
InnoLux appealed the commission's decision to the General Court. The General Court reduced the fine to €288 million because it was satisfied that InnoLux's economists had incorrectly included data which was not connected to the cartelised LCD panels and should not have been taken into account by the commission. However, it dismissed the remaining arguments – the most important of which was that it was erroneous to include direct EEA sales through transformed products when determining the value of sales.
InnoLux then appealed to the ECJ, arguing again that the commission had erred in including the sales of finished products incorporating the cartelised LCD panels. It also contended that the commission had breached the principle of non-discrimination in treating vertically integrated companies differently from non-vertically integrated companies, and in doing so had exceeded its territorial jurisdiction.
InnoLux contended that the direct EEA sales through transformed products (ie, televisions and notebooks) were on a different market from the cartelised LCD panels and thus not the subject of the decision; therefore, they could not be taken into account when calculating the value of sales.
The ECJ rejected this argument. It noted that the European Commission had to calculate a fine that reflected the economic significance of the infringement and InnoLux's part in it. It stated that it would be contrary to the goal of competition law fines if vertically integrated companies could avoid fines by incorporating cartelised products outside the EEA and then selling them into the EEA. Despite the fact that the finished products were not on the cartelised product market, to leave them out would artificially minimise the economic significance of the cartel in practice.
This practice was further bolstered for the court by the fact that the commission took into account the sales of finished products only up to the proportionate value of the cartelised panels in order to assess the economic significance of the infringement.
The ECJ found that the General Court had been right to distinguish between vertically integrated cartel participants and non-vertically integrated cartel participants. Had it not done so, the vertically integrated participants would have had an unfair advantage.
Vertically integrated companies involved in cartel activity may gain financially in two ways: at the horizontal level in the market for the cartelised goods and in the downstream market for transformed products. In this case, the internal sales of the cartelised panels were made at prices affected by the cartel. The cartel participants knew that these prices affected the prices of the finished products into which they were incorporated. This gave them an unfair advantage over non-vertically integrated companies.
Vertically integrated undertakings have the option of passing on the price increases resulting from a cartel in the price of the finished products or not passing on the increase and instead benefiting from a price advantage against their competitors for the cartelised product. The ECJ thus found that the commission is allowed to treat sales made by undertakings that form a single economic unit with the company incorporating the product differently from those that do not, because they are in a different commercial position.
The ECJ rejected the argument that the commission had exceeded its jurisdiction by taking into account sales of finished products when calculating the fine because those products incorporated cartelised panels that were internal sales outside the EEA. InnoLux argued that the commission's methodology amounted to an extension of territorial scope, but the ECJ held that the cartel had been implemented in the EEA through direct sales to third-party undertakings within the EEA.
Following previous case law, where a cartel is formed is irrelevant if it is implemented within the European Union. The value of sales for fine calculation should make no distinction between sales within a group and sales to independent third-party undertakings. The value of sales includes all sales relating to the cartelised goods, including internal sales within a vertically integrated undertaking. In this case account could be taken of sales from undertakings outside the EEA of finished products inside the EEA to third parties; therefore, a territorial scope argument was deemed irrelevant. The key takeaway is that all sales relating to goods concerning an infringement can be taken into account – especially where the matter at hand is the fine, not the establishment of infringement.
Unusually, the ECJ did not follow the opinion of the advocate general, who thought that internal sales made outside the EEA should not have been taken into account, even if transformed and sold into the European Union.
Lastly, the court confirmed that the commission was not required to take into account the possibility of proceedings relating to the same sales in other jurisdictions. No 'double-jeopardy' principle required it to take into account fines that might be imposed in non-member states.
The ECJ has confirmed that the European Commission has wide discretion in interpreting the value of sales when setting fines. In doing so, it is prepared to take into account sales of finished products from outside the EEA that incorporate cartelised components. Neither the General Court nor the ECJ considered whether the commission can go further and take into account indirect sales (ie, sales of cartelised components to a third party outside the EEA which it then sells into the EEA) – although neither ruled it out. Informal comments from commission officials indicate that they would be prepared to do so to ensure that a fine reaches sufficiently deterrent levels.
For further information on this topic please contact Katherine Cousins or Bill Batchelor at Baker & McKenzie by telephone (+32 2 639 36 11) or email ([email protected] or [email protected]). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.
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