Only this month, the European Commission imposed its highest total and individual fines yet on an illegal market-sharing cartel which took place in the car glass manufacturing sector. Totalling the eye-watering sum of €1.384 billion, this fine marks more than ever the current Competition Commissioner's resolve to give the EU competition rules serious "bite".
The unhappy four car glass producers (Asahi, Pilkington, Saint-Gobain and Soliver) were found to have participated in an illegal market-sharing cartel. Saint-Gobain's €896 million fine is the highest cartel fine ever to be imposed on an individual company. Significantly, this sum included a 60% increase for being a repeat offender. This dwarfs the previous highest individual fine imposed of €480 million on Thyssen Krupp last year. By contrast, Asahi/AGC Flat Glass obtained a 50% reduction of €113 million by applying for leniency.
Following a "tip off" from an anonymous (but reliable!) source the Commission, in a series of dawn raids in 2005, found evidence of meetings over a five-year period where tender allocations were made to stabilise market shares. Renegotiations of existing contracts were discussed. Exchange of commercially-confidential information was also found to have taken place.
The latter is particularly significant. Personnel untrained in the subtleties of competition law often do not appreciate that information exchange with competitors is much more than slightly suspect practice – but may be viewed as a hard-core cartel activity; rendering them to criminal prosecution (in the UK and some other jurisdictions) and their employers to heavy fines.
Commenting on the level of the fines, Competition Commissioner Neelie Kroes stated:
"These companies cheated the car industry and car buyers for five years in a market worth two billion euros in the last year of the cartel. The Commission has imposed such high fines because it cannot and will not tolerate such illegal behaviour. Management and shareholders of companies that damage consumers and European industry by running cartels must learn their lesson the hard way – if you cheat, you will get a heavy fine."
Those fines are a reminder that penalties reaching the upper limit of up to 10% of a company's global annual turnover are now no longer an Armageddon scenario but a realistic possibility. Significantly too, fines are based on a company's turnover, not profit. The potential consequences of this for a company that, for example, operates on relatively low margins could be catastrophic. In setting fines, the Commission is not obliged to consider a company's ability to withstand the fine.
Accordingly, the basis upon which fines are increasingly imposed, combined with other 'collateral damage', are that a company's viability may be under threat.
What are the prospects of damages claims?
It is true that the Commission makes reference in its press release to the possibility of damage claims which may be bought by "any person or firm affected by anti-competitive behaviour as described in this case", stating further that "a Commission decision is binding proof that the behaviour took place and was illegal".
The background to such an exhortation to seek relief in damages is the policy priority of Commissioner Kroes. She is likely to present legislative proposals on recovery of damages next Spring, before the end of her term.
This follows on from the Commission White Paper on damages, issued on 2 April 2007, which is currently before the Select Committee on Legal Affairs of the European Parliament.
Setting aside the prospect of any EU legislation on the topic, which is not likely to be forthcoming in the short term, entailing as it will amendments to domestic civil judicial proceedings; all this begs the question as to how realistic the prospect of damages are.
Within England and Wales only this month, the Court of Appeal put paid to the prospect of windfall damages to claimants. Thus, in Devenish Nutrition Ltd v Sanofi–Aventis (France), "follow-on" claim for damages against Sanofi-Aventis for participation in the animal feedstuffs vitamins cartel, Devenish claimed damages against Sanofi-Aventis's on, inter alia, the basis of restitution of the overcharging on account of Sanofi's unlawful profits.
The Court of Appeal dismissed Devenish's argument that damages for breach of statutory duty (i.e. compensatory) would be insufficient (on the basis that the overcharging had been passed on to customers downstream).
In a judgment that must have turned the hearts of US class-action experts cold; and which rode roughshod over the policy aspirations of the European Commission (and, indeed, the Office of Fair Trading); Longmore LJ stated:
"The only real argument in favour of an order for an account of profits is the argument of policy that cartels are a notorious evil and civil courts should in some way provide an incentive for their eradication by making such an order." Moreover…. "Neither the law of restitution nor the law of damages is in the business of transferring monetary gains from one undeserving recipient to another undeserving recipient even if the former has acted illegally while the latter has not".
The brandishing by purchasers of car glass of the Commission decision is unlikely to result in any windfall claim for damages. The issue of causation and quantum will be a stumbling block. A customer would have to establish, to a sufficient level of proof that the cartel resulted in a higher price being charged than would have been the case, absent the cartel. This may not be straight forward, as the cartel was concerned with stabilising market shares and allocating of tenders, rather than price-fixing simpliciter. Great work for an economist; but it will not necessarily result in a damages award. Ironically, such stability may have occurred in any event in an oligopolistic market of four players with a collective market share of 90%.
Presuming that causation can be established – what will the quantum be, in circumstances when the manufacturers are likely to have passed any increase in pricing (if there was indeed any) onto consumers, as part of its general costs? Again, it is difficult to envisage a dash towards the court room on this issue.
Damage to corporate reputation and limits to the effectiveness of a leniency application
This case also illustrates another, perhaps equally damaging, consequence for a company that is found to have breached the competition rules: damage to corporate reputation. Asahi made a leniency application and, having cooperated fully with the Commission and provided it with additional information after the dawn raids, its fine was reduced by 50%. While the financial penalty was greatly reduced, Asahi's company name has hit the headlines as a member of this illegal cartel in just the same way as those of the other three companies.
So, what is a company to do?
There is no clear appetite for US-style triple damages/actions in the EU. The latest English case has affirmed the compensation principle of damages, and there is no body of EU case law that points towards a principle of account of profits or exemplary damages as a measure of damages. Accordingly, an increasing level of fines seems to be the regulators' (blunt) response to the perceived failure of the civil courts to rise to the challenge of deterring cartel activity. There is no real prospect that this will change in the near future, despite the noise that is being made about class actions.
Fines of the levels we have been seeing will bring home to management and investors how a competition investigation and fine can destroy value for all stakeholders, including employees, whose jobs may be at risk by the sheer level of fines, to say nothing on the effect of shareholder value.
This dynamic may change however as more businesses take care to ensure that there is a meaningful compliance ethos within it. As a consequence anti-competitive acts will be carried out by mavericks, and the company may be able to demonstrate that this was so. A sophisticated compliance programme should aim at ensuring that is the case. Such an ethos should also, at best, be a prophylactic, or lead to early detection. If the worst does occur, it will assist in mitigation. That being so, law and policy may proceed to focus more on pursuing individuals under criminal law, who ultimately are the perpetrators of such "hard-core" cartel activity.
Arguably, this is a more focused result with less catastrophic results for all stakeholders. In the meantime, managers and legal officers are well advised to focus personnel on compliance, compliance and compliance, in order to retain the hard won value of their company.
Oh, and to answer the question on everyone's mind, who gets to keep the €1.384 billion? It will go into the general EU coffers.