Cartel enforcement in the EU

Transcription

1 Cartel enforcement in the EU FEATURE Adapting to the new environment Illustration: Lizzie Collcutt/Nb Illustration Recent reforms of the EC competition regime are having a significant impact on the authorities abilities to detect cartel activity and conduct investigations. Mathew Heim and Carel Maske explain the reforms and provide some guidance on how to adapt to the new environment. The entry into force of Regulation 1/2003 (Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (OJ 2003 L1/1)) on 1 May 2004 enhances cartel enforcement in the EU. While the European Commission has not as yet used all its new powers in cartel investigations, it can now, for instance, interview employees on substantive issues and search private premises. In addition to the Commission s new powers, the recent reform of EC competition rules has changed the ways that cartel cases are brought to the attention of the regulator. 27

2 This affects how companies should assess their exposure as well as how they prepare for and react to cartel investigations. This article considers the new environment that in-house counsel and company legal advisers are exposed to when dealing with cartels. In particular, it focuses on: How cartel investigations are triggered, and who can conduct them. The new powers at the Commission s disposal and the corresponding safeguards. The risk assessments that should be undertaken in the new climate. How investigations are triggered Recent changes to the rules have enhanced methods of discovering cartel activity at all levels of enforcement. In essence, cartels can come to light either: Directly, through whistleblowers and complaints by third parties. Indirectly, through other regulatory activities, such as sector inquiries or merger investigations. Whistleblowers The vast majority of cartel cases are brought to the Commission s attention by a whistleblower, which can act from a variety of motivations, including: Fear of sanction or preempting an impending investigation. Discovery of a cartel following compliance audits or financial and/or merger due diligence. A desire to benefit from immunity. For individuals, motivations can range from revenge to concerns for personal or professional security. The Commission notice on immunity from fines and reduction of fines in cartel cases (OJ 2002 C45/3) (Leniency Notice) for the first time grants full immunity in exchange for the submission of qualitative evidence. It has resulted in an unprecedented wave of leniency applications; 20 in the first year alone, compared to 16 between 1996 and The Leniency Notice continues to be a successful incentive for cartel participants to cease their illegal practices and co-operate with the Commission. Decentralisation of EC anti-trust regulation also encourages national competition authorities (NCAs) to apply both national and EC rules and to run investigations that may even have EC dimensions (see below Who can conduct investigations?). This can make leniency applications complex, as procedures have not been harmonised among the member states. In all, 14 of the 25 member states operate their own leniency programmes, so that applying for leniency to the appropriate or well placed authority is far from straightforward. As a result, in cases that substantially affect competition in one or more member states, parallel leniency applications to the Commission and one or more NCAs may become the suggested approach. Matters become more complicated because an application for leniency to one authority is not to be considered as an application for leniency to any other authority. In addition, if several competitors are applying for leniency at the same time, it is unclear which will take precedence. Over and above fines, certain national jurisdictions have more powerful penalties with the existence of criminal sanctions for individuals. These penalties are increasingly playing a role in leniency applications. For instance, a leniency application in the UK would also include a request for a no action letter for company directors granting them immunity from criminal prosecution. However, this is not the case in other member states that can impose criminal penalties. Leniency applications also raise conflict of interest questions between the company concerned and the company directors involved. Complaints by third parties In practice, complaints have tended not to be the starting point for Commission cartel investigations, although they have been the norm for NCAs in some member states. Complaints rarely provide as much evidence as leniency applications, as the innate secrecy of a cartel prevents third parties from possessing sufficient information. The Commission will only open an investigation if there is a realistic chance of uncovering sufficient evidence to prove a cartel. There is now a more formalised complaints process (Article 7(2), Regulation 1/2003). The new Commission Notice on the handling of complaints by the Commission under Articles 81 and 82 of the EC Treaty (OJ 2004 C 101/ 65) also encourages citizens and undertakings to inform EU or national regulators of any suspected infringements of EC competition rules. Formal complaints must be submitted on a Form C, including all supporting documentation and a non-confidential version of the complaint. The Notice outlines the Commission s procedures when dealing with complaints and gives an indicative time limit of four months for informing the complainant of the Commission s proposed course of action. According to Competition Commissioner Monti, this allows the Commission to improve the quality of complaints from the outset and allow [the Commission] to focus on the complaints that merit priority treatment (Commissioner Monti, Proactive Competition Policy and the role of the Consumer, 29 April 2004, Dublin). To supplement formal complaint proceedings, informal methods have been developed to encourage complaints and give the Commission better access 28

3 Checklist: key considerations for risk assessment Do you have a compliance policy in place and, if so, is it adequate? Consider either adopting one or updating and broadening current policy. Do you need to revisit your exposure? Consider whether the company is active in an industry that is likely to become the subject of a sector inquiry. It is also important to consider whether the company practises agreements that are particularly exposed to scrutiny by the Commission. Has management been sensitised to the new risks? Inform management of the Commission s new powers and consider providing support matching the corporate culture (for example, installing a hotline). Do you have a clear employee relations policy covering behaviour in competition investigations? If not, consider formulating one. How are corporate governance obligations managed? Ensure that the appropriate people (such as in-house counsel) and departments are involved in compliance. to information. The recently created Consumer Liaison Officer within the Commission s Directorate General for Competition (DG Competition) provides a direct point of contact for disenchanted consumers. The task of this officer is to: Be a primary contact point for consumer organizations and to alert consumer groups to competition cases where their input might be useful ( Commission appoints Consumer Liaison Officer, Commission Press Release IP/03/1679, 9 December 2003). Provide the Commission with information on breaches of competition law. Enhance contacts with NCAs regarding consumer protection matters. In addition, the Commission has created a special website to collect information on alleged competition law violations (see box, Related information). Sectoral inquiries The Commission has the power to review entire sectors or types of agreement under Article 17 of Regulation 1/2003. Sector inquiries involve a general review of a sector s competitiveness with the aim of removing obstacles to free competition. DG Competition has stated its intention to use this power widely. While the outcome of such inquiries will not always result in the Commission taking action, there is a growing risk given their success in some member states as a way of uncovering cartels. While certain industry sectors are clear candidates for scrutiny, there is no certainty as to which sectors will be investigated. However, there are three points worth considering: In assessing markets to be reviewed, DG Competition will focus on sectors where there are only a few players, where cartel activity is recurrent or where abuses of market power are generic (Commission Communication A Pro-Active Competition Policy for a Competitive Europe COM (204) 293 Final, 20 April 2004). Specific indicators include price trends, lack of innovation, trends in capacity development and so on. Whistleblowers may be induced to come forward more readily if they believe that a sector investigation will uncover their cartel. DG Competition officials reviewing sectors will tend to be anti-trust enforcers who bring a particular prosecutorial approach to investigating competitiveness. As a result, companies should do all they can to prepare for a possible inquiry. Measures that should be taken include enhancing internal due diligence and paying particular attention to anti-trust issues in financial and/or merger due diligence. The recent restructuring of DG Competition also means that information acquired in the course of a merger review may lead to anti-trust investigations; either following an acquirer s due diligence or following the review. There are already indications of this in a number of sectors. Who can conduct investigations? Under the system of parallel powers created by Regulation 1/2003, cases are to be dealt with either by the Commission, several NCAs or a single NCA with the assistance of the authorities of other member states. NCAs can carry out any inspection or fact-finding measure under national law in order to assist another NCA (Article 22(1), Regulation 1/2003). In addition, the Commission can request an NCA s assistance in carrying out inspections (Article 22(2), Regulation 1/2003). In concrete terms, this means increased manpower through the assistance of NCAs, including hundreds of experienced officials available at the same time. For companies, this means several branch offices or subsidiaries being raided at the same time, with each requiring the assistance of in-house and/or external counsel. This emphasises the need to set-up appropriate internal procedures to deal with inspections and ensure that sufficient external support is readily accessible. New Commission powers and corresponding safeguards The new investigative tools available to the Commission under Regulation 29

4 1/2003 are aimed at addressing the growing difficulties involved in detecting infringements of competition rules. These tools include: The right to interrogate employees on substantive issues. The right to take witness statements. The right to search private premises. The ability to seal off premises for up to 72 hours. The Commission can fine companies (including by way of periodic penalty) for non-compliance or the provision of incomplete or incorrect information in relation to any of the above. Although not new, the level of these penalties has increased. Interrogating employees The Commission or persons assisting the Commission in its investigation (including NCA officials) can ask any representative or member of staff [ ] for explanations on facts or documents relating to the subject-matter and purpose of the inspection and to record the answers (Article 20(2)(e), Regulation 1/2003). This means that, while conducting the various types of inspection under Regulation 1/2003, officials can interrogate any company employee. It represents a marked change to the situation before Regulation 1/2003 came into force, where the Commission could ask questions on the nature of a document, but not on its content. The Commission has already used this new power to conduct on-thespot interviews, and companies should be prepared for them. Without a clearly pre-defined policy, it will be difficult to anticipate how an employee will react to an interrogation by anti-trust enforcers, and this could end up being a major concern during an inspection. Steps a company can take to prepare for on-the-spot interviews include: Ensuring that employees are aware of the extent of their individual obligations, as the Commission may fine a company (as opposed to the individual) where incorrect or misleading answers are given. Fines can be imposed whether the answers were given intentionally or negligently. While incorrect statements can be rectified, this is only allowed where the member of staff was not authorised by the company to answer the questions, and the incorrect answers remain on the file (although with the rectification attached). Designating selected staff members per location to respond to questions. This involves adopting a clear policy stating that employees do not give statements beyond their capacities, as well as training people so that they funnel inquiries to the right person within the company. Such designated points of contact should be trained to understand anti-trust questioning to avoid ambiguous statements, which are difficult to rectify and will remain on the Commission s file. Developing a pre-defined policy that strikes a balance between the need to ensure that employees comply with the law (with all the consequences this entails) and the need to ensure that they co-operate with any external or internal investigation. Where an issue does arise, a policy is even more vital as an employee s interest will not always coincide with the company s interest. Witness statements The Commission can conduct voluntary interviews of people in relation to any of its investigations (Article 19, Regulation 1/2003). The Commission could gather such statements in an attempt to gain information from individuals who otherwise risk being pressured by their colleagues or management. This type of interview can be conducted by any means, including by telephone or electronic means, and the transcribed content can only be approved by the interviewed person. False statements do not carry the threat of sanction. In this context, the use of compliance training is key, as employees providing information to the Commission unilaterally should not be interfered with by other employees during the investigation. Searching private premises As of 1 May 2004, the Commission can enter any premises (business or private, belonging to company directors, managers and other employees) that it suspects to contain books or records related to the business and subject matter of its investigation (Article 21, Regulation 1/2003). These powers were introduced because experience has shown that cartel members kept relevant files at home or in their cars, rather than at their place of business. In order to inspect private premises, the Commission must: Have a reasonable suspicion (undefined and untested) that books or records related to the business and subject matter of its investigation are at the relevant premises. Consult with the NCA in the country concerned. Obtain the prior approval of a court in the relevant country. The Commission does not seem to have used this power yet but companies dawn raid preparation measures need to be revised to take them into account. Management should be forewarned of their own (and their families ) exposure, particularly where personal liability (civil or criminal), can come into play. They should be provided with all necessary support, such as a hotline giving them direct access to in-house counsel or external lawyers. Sealing off premises The Commission has other powers, including the ability to seal off premises for up to 72 hours during the course of the inspection (Article 20(2)(d), Regulation 1/2003). In theory, the Commission could even seal whole buildings, and, while the provision seeks to prevent evidence being tampered with overnight, the exercise of this prerogative could seriously hamper day-to-day business activity. 30

5 Related information This Global Counsel article can be found on Global Counsel Web at The following information can also be found on Know-how topics Competition Handbooks Competition Law Practice Manuals EC Competition Law Articles Dawn raids: handling the commercial imperatives Opinion: developments in private anti-trust enforcement in the EU Civil cartel litigation in Europe: the changing landscape Cartel prosecution around the world Dawn over Europe: enforcement of EU competition policy Private antitrust remedies: latest developments Private antitrust remedies: Part 1 Private antitrust remedies: Part 2 Managing a media crisis: preventing reputational damage Weblinks Europa website (DG Competition, Antitrust other documents) Safeguards in place A number of new safeguards have been introduced, most notably in relation to exchanges of information between the Commission and NCAs or between NCAs (in Regulation 1/2003 and Commission Regulation 773/2004 relating to the conduct of proceedings by the Commission pursuant to Articles 81 and 82 of the EC Treaty (OJ 2004 L123/18)). The exchange of (confidential) information between the Commission and NCAs can only take place on condition that it is only used [ ] for the purpose of applying Article 81 or Article 82 [ ] and in respect of the subject-matter for which it was collected by the transmitting authority (Article 12(2), Regulation 1/2003). However, if the information does not lead to a different outcome it may also be used for the application of national competition law. How this will operate in practice, given the lack of harmonised national rules on the matter, is difficult to predict. Even more difficult to gauge is the practical effect of the rules regarding the exchange of information used to impose sanctions on natural persons, which are of particular relevance in cartel proceedings. The exchange of information requires sanctions of a similar kind for violations of competition rules in the jurisdiction of the transmitting authority or the same level of protection of the rights of defense of natural persons as provided for under the national rules of the receiving authority (Article 12(3), Regulation 1/2003). Again, due to the lack of harmonisation in relation to safeguards between the 25 member states, authorities might tend to a wide interpretation of these provisions. Other safeguards, which are not new, include those relating to: The right to be heard. Access to the file. The treatment of business secrets. Despite the fact that the Commission s powers and tools of investigation have been bolstered, there has been no significant alteration to the relevant safeguards for those under investigation. As a result, companies have an added incentive to undertake due diligence and bring employees into the competition compliance process. The underlying message is to adopt an active approach to competition compliance and not to rely too heavily on these safeguards. Risk assessment Under the new rules, the Commission has greater access to information and is pursuing a more pro-active competition policy. It is using its free capacity following the abolition of the Article 81 EC notification procedure to uncover any cartel activity. These changes should be factored into any risk assessment carried out by a company when it discovers or suspects involvement of its employees in cartel activities. 31

6 Any assessment under the new rules should take into consideration the increased risk of: Civil litigation. Fines. Criminal penalties. A company already under investigation should also be aware of, and prepare for, other issues that arise, for instance, in relation to employees, financial market communications, corporate governance and reputation. (See also Checklist: key considerations for risk assessment.) Civil litigation Co-operation requires qualitative evidence to be submitted to the Commission, which typically takes the form of a corporate statement or a confessional, setting out in detail the entire workings of a given cartel. If a guarantee could be given that such a corporate statement would not go any further, then the risk of civil litigation arising from an application for immunity would be relatively minor. There is also the possibility of submitting a corporate statement orally, however, it is unclear how far this procedure will protect such a statement from ending up as evidence in civil litigation. Damages cases are increasingly being brought to civil courts throughout Europe. Forum shopping is well underway, with the UK courts granting jurisdiction to non-uk claimants against non-uk defendants in Provimi Ltd v Roche Products Ltd et al ([2003] QBD, approved judgment at ), where their claims were consolidated with those of UK claimants (see Civil cartel litigation in Europe: the changing landscape at There have been several damages claims in Germany, most of which have been thwarted by passing-on defences (although reforms depriving cartel members of this kind of defence are on their way). Successful claims have also been seen in France. So far, most European cases have been settled due to the fear of civil damages precedents being established. In the meantime, in the US, F. Hoffmann-La Roche Ltd v Empagran, SA (Docket No , decided on 14 June 2004) has not entirely excluded the possibility of non-us plaintiffs bringing proceedings against non-us defendants in US courts (see Opinion at page 45 of this issue). Fines When compared to the risk of civil litigation, a Commission fine, which may not exceed 10% of the relevant (including parent) entity s turnover, may not be the greatest of a company s worries. However, it is not clear whether one fine alone will be imposed under the new rules. There is the possibility that in parallel proceedings (see above Who can conduct investigations?) multiple fines will be imposed. It appears that the Commission does not consider that multiple sanctions for the same cartel would fall foul of the principle of double jeopardy. The reasoning is that each authority can only fine for its sphere of competence. The authorities fining policies should be closely observed, as it is unclear how they will investigate and penalise different aspects of the same cartel in isolation. Criminal penalties Cartel activity carries criminal sanctions in a number of member states. Criminal penalties can range from cartel specific to non-cartel specific and from quasi-criminal pecuniary sanctions to prison sentences. In some member states bid-rigging is subject to criminal sanctions, in others it is price fixing or price tampering. Recently introduced changes to national legislation mean that the UK and Ireland carry the most stringent cartel specific sanctions with prison sentences for hardcore activities (price fixing, market-sharing and bidrigging) of up to five years. The fact that a number of member states can impose criminal and quasi-criminal sanctions on individuals makes the task of dealing with cartel investigations even more delicate. In addition, under recent UK law amendments, directors can be disqualified for up to 15 years for infringements of competition rules. This applies where directors either contributed to the violation, took no steps to prevent it, or did not know of the violation but ought to have known that a certain agreement amounted to a violation. Other issues The damage that a cartel investigation inflicts extends beyond financial or criminal penalties. There is an additional need for companies to address issues that arise in relation to: Employee relations. There is a greater incentive for bringing employees into the anti-trust compliance process, given the enhanced Commission powers that directly affect individuals, as well as eventual criminal penalties under national rules. Employees need to understand the obligations that they are now under, as well as the legal and corporate parameters within which they operate. Corporate policy on dealing with employees found breaching competition law should also take into account the conflicts of personal and professional interests that may arise. In addition, they should reflect the different levels of employees responsibilities, taking into account that these may vary under national employment laws. Sanctions against employees are notably problematic in cases where management might have been aware of or condoned the illegal activities. In addition, the likely impact of any anti-trust proceedings must be explained to employees in the spirit of the new rules governing the provision of information to employees (Council and Parliament Directive (EC) 2002/14 of 11 March 2002 establishing a general framework for informing and consulting employees 32

7 in the European Community (OJ 2002 L80/29)). This is especially true where financial exposure enhances the risk that operations might be shut down or spun off. Finally, it makes good business sense to ensure that company representatives who have the task of dealing with customers or the press on a day-to-day basis are appropriately involved and informed. Financial market communications. Dealing with the wider issue of relations with the markets can be fraught as cartel investigations, and in particular dawn raids, move share price. Exposure does not end after the news of an investigation or decision is made public. Bad news can continue to drive share price down, placing a strain on the capital adequacy base of the company in question. In addition, financial provisions need to be made and routinely reviewed. Effective preparation is essential to managing the evolving process of an investigation and any ensuing litigation. Corporate governance. There will be intense scrutiny as to how management deal with a cartel investigation, potential sanction and fallout. Shareholders will expect the board to react decisively and promptly and to attribute responsibility and ensure that lessons are learned. Listed companies involved in such investigations are in the difficult position of assessing how to disclose the activities to the markets as disclosure requirements are not always clear. As a result, compliance programmes, taking into account the wider commercial needs of a company, are good corporate governance. Corporate reputation. A company must also consider how a competition investigation affects its reputation. Any compliance plan should contain a crisis communications strategy, as cartel investigations invariably end up as such. Such a strategy demonstrates that management is taking the matter seriously and shows that a degree of control has been regained. This will assist in placating the concerns of a company s wider stakeholders. Mathew Heim is a director at The Centre, a Brussels-based international public affairs consultancy and think tank, specialising in EC competition policy. Carel Maske is of counsel in Latham & Watkins Global Antitrust and Competition Practice, operating out of the Brussels and Frankfurt offices. 33