EU/UK Competition Law Newsletter – July 2010

July 1, 2010

EU Cartel Fines; Ability to Pay Becomes Highly Relevant

On June 23, 2010, the European Commission recognized that even its flagship policy (the fight against cartels) must take into account the financial crisis. In adopting a decision fining 17 bathroom equipment manufacturers a total of EUR 622 million for a 12-year cartel covering six EU countries, the Commission took into account that five of the companies were financially in “very bad shape already,” and accordingly reduced the levels of their fines to “a level they should be able to pay.” This approach is referred to in the Commission’s 2006 guidelines on fines, but only now has it become of real practical relevance.

Of the 17 companies, 10 claimed they would be unable to pay, but the Commission found that only half of these claims were justified. This required a case-by-case analysis of financial statements and projections, profitability, solvency and liquidity, as well as the relations between the companies and their banks and shareholders, and “the social and economic context of each company” (which would appear to leave a wide discretion). The justification for reductions in fines, where appropriate, is that pushing a company into bankruptcy would inevitably reduce competition.

A further illustration of the new importance of this ability-to-pay analysis was provided by the June 30, 2010, decision of the Commission in which it fined 17 producers of prestressing steel a total of more than EUR 518 million. Three of the fines were reduced by inability-to-pay arguments, albeit a further 10 companies had these applications denied. Also of importance in this decision was the finding that two companies did not fulfill their obligations to cooperate as leniency applicants, and therefore did not receive any reduction in their fines.

European Commission Commitments Procedure Approved by European Court of Justice

In a judgment described by the Commission as “very important,” on June 29, 2010, the European Court of Justice (ECJ) upheld the Commission’s use of commitments to settle competition law investigations.

The case arose out of the Commission’s 2006 decision to accept De Beers’ (the world’s largest rough diamond producer) offer of commitments to progressively phase out by 2009 purchases of rough diamonds from Alrosa (the world’s second largest rough diamond producer). This ended an investigation of De Beers under Article 102 of the Treaty on the Functioning of the European Union (which prohibits the abuse of a dominant position in the EU).

The essence of the ECJ’s judgment is that the commitments procedure is voluntary and accordingly cannot be compared with a case in which the Commission imposes remedies on a party: “undertakings which offer commitments consciously accept that the concessions they make may go beyond what the Commission could itself impose on them in a decision adopted by it.” It had not been shown that the commitments manifestly went beyond what was necessary to address the concerns expressed by the Commission.

The Commission will be relieved by this judgment, as it has been making very wide use of the commitments procedure to settle cases, and it has become an important tool in its armory.

UK Directors Face Further Compliance Challenges

On June 29, 2010, the UK Office of Fair Trading (OFT) published revised guidance on director disqualification orders in competition law cases, signaling its intent to use these sanctions to deter anticompetitive activity. In a statement, the OFT said, “[the] guidance should be taken as a clear message that we will actively seek disqualification of directors found to have engaged in anti-competitive behavior or who ought have known it was going on” (emphasis added). The intention is to increase the incentives on UK directors to take responsibility for competition law compliance by their companies.

The guidance sets out how and when the OFT and certain UK sectoral regulators will take action to disqualify directors where they uncover evidence a director was responsible for, or ought to have known of, competition law breaches at a company. The nature of the breach is relevant and action is “more likely . . . in cases involving more serious breaches” (which principally means cartels).

Under the UK Company Directors Disqualification Act, a director can be disqualified from acting as a director for up to 15 years if his company is involved in a breach of competition law and the court considers that he is unfit to be concerned in the management of a company as a result.

It can be noted that the OFT’s specific powers to seek a disqualification order for infringements of competition law have never been used. The three individuals convicted in June 2008 of the UK cartel offence for their involvement in the marine hose cartel were disqualified from acting as directors under the general powers available to UK courts in relation to directors who have committed a criminal offence.

Although concerning anticorruption, it is further interesting to note that the new UK Bribery Act 2010 has also increased the compliance difficulties faced by directors of UK companies. That act (which has a wide extraterritorial scope) includes a strict liability offence with unlimited fines for commercial organizations of failing to prevent bribery being committed. It is a defense for the company to show that it has put in place “adequate procedures” (which is undefined but will no doubt include competition law-type compliance programs) designed to prevent persons associated with the company from undertaking corrupt activities.

These developments provide further illustrations, as if they were needed, of the ever-increasing importance of compliance programs and training covering competition law and corruption issues in the UK.

Additional EU/UK competition law news coverage can be found in our news section.

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