Prof. Dr. Alexander Reuter, attorney-at-law, GÖRG Partnership of Lawyers, Cologne
Corporate Sanctions and Compliance:
ECJ tightens corporate liability for competition violations: „Effective enforcement of rights“ also requires „effective protection of fundamental rights”
The European Court of Justice (“ECJ”) has developed a broad concept for the definition of an “undertaking” for purposes of EU corporate fines. According to this concept, an „undertaking“ within the meaning of Art. 101 TFEU is „any entity engaged in an economic activity, irrespective of its legal form and the way in which it is financed“. The ECJ determines the scope of such an „economic unit“ according to rules similar to those of a group of affiliated companies. The Commission applies this broad concept of the term “undertaking” to state aid law as well.
So far, it was not clear whether this broad concept of an “undertaking” also applied for purposes of damage compensation under civil law, in particular whether all legal entities which, according to the ECJ, belong to the „undertaking“ of a cartel member for fine purposes, are also liable for damages. In a preliminary ruling procedure from Finland, the „Skanska“ case (Case C-724/17) Advocate General Wahl had affirmed this some time ago. The ECJ followed the Advocate General in its ruling of 14 March 2019 for damage claims under competition law (Case C-724/17). In the Skanska case, the ECJ ruled that the broad concept of an undertaking in Art. 101 TFEU is applicable to determining the parties liable for damages in competition law cases. In addition, under certain circumstances, civil liability also exists for the legal successor for damages resulting from antitrust violations of an acquired and subsequently liquidated company.
1. The interaction between EU competition law and national tort law
The question gains importance through the fact that Art. 101 and 102 TFEU are directed at „undertakings“. According to the case law of the ECJ, companies within the meaning of Art. 101 and 102 TFEU are economic units that can comprise several natural or legal persons. It is therefore the Commission’s consistent practice in fine proceedings not only to impose fines on companies whose employees have acted contrary to competition law, but also on their affiliated companies. (Furthermore, legal successors of individual companies re held liable by the Commission on the basis of its concept of “economic continuity”.) The separation between legal entities recognized in almost all European Member States has thus been abolished in this connection. However, national civil law and civil procedural law applies in principle to the enforcement of EU competition law by way of action under civil law, even if the ECJ has affirmed claims for civil law damages to be existent in case of an infringement of EU competition law under Art. 101, 102 TFEU and has determined certain aspects of such damage claims.
This gave rise to the questions referred in the Skanska case: Finnish law (as the civil laws of all other EU member states) limits liability to damages to the legal person concerned. In the original proceedings, the question thus arose as to how EU and national law interact as regards claims for damages for breach of competition law.
Although the Union legislator intended to regulate the interaction between Union law and the national rights of the Member States by way of Directive 2014/104, this Directive was not applicable ratione temporis to the Skanska case. Furthermore, the Directive leaves the fundamental questions set out above unanswered.
2. Purpose of the damages
Advocate General Wahl had understood the previous case law of the ECJ to mean that claims for damages under competition law should not only compensate for the damage caused by anticompetitive behaviour, but should also ensure that EU competition law „develops its full effect“ and contributes to deterring companies from „participating in anticompetitive agreements or other anticompetitive – often covert – behaviour“. Admittedly, according to Advocate General Wahl, the European Court of Justice, in its choice of words emphasizing the rights and effectiveness of the Union’s competition law, „places particular emphasis on the deterrent function of actions for damages for breaches of the Union’s competition law“.
Nevertheles, the procedural and substantive legal framework for the assertion of a claim for damages is, generally speaking, matter of national law. According to a much quoted finding of the European Court of Justice, however, the Member States must ensure that national regulations comply with the principles of “equivalence and effectiveness”.
However, in his Opinion of 06 February 2019, Advocate General Wahl opined in favour of also determining the question of who is liable under civil law directly in accordance with Art. 101 TFEU. Accordingly, the Advocate General found that the principles of the European Court of Justice on the economic unit and on economic continuity in fine proceedings under EU law should also apply to civil actions for damages under national law.
3. The decision of the ECJ
The ECJ followed the Advocate General’s opinion, but in its emphasis on the prevention purpose of Art. 101, 102 TFEU it went even further than the Advocate General:
a) According to the European Court of Justice, the concept of an undertaking in Art. 101 TFEU also applies to national competition damages law. The ECJ so held because the person liable for damages is directly determined by EU law. According to the ECJ, Art. 101 (1) and Art. 102 TFEU generate direct effects in the relationships between individuals and directly create rights in their person which the national courts must uphold. Thus, according to the ECJ, all legal persons belonging to an „economic unit“ of the company infringing competition law are liable for damages in the event of violations of Art. 101, 102 TFEU.
b) Successors in title of a company found to be liable for damages under competition law are also liable, even if the originally liable company no longer exists, but the successor in title continues the economic activity of the lost company. This also applies if the legal successor takes over the company in question by way of a share deal. The decision does not address legal succession liability for the acquisition of the assets of the company that committed the infringement of competition (asset deal). However, there is much to suggest that the ECJ will also affirm legal succession liability here.
c) The ECJ bases its reasoning solely on the purpose of prevention and punishment of Art. 101, 102 TFEU: According to the ECJ (paras. 43 et seq.)
d) The ECJ has not limited its decision in time. However, as the reference case (cartel on the Finnish asphalt market between 1994 and 2002) shows, it also applies to past infringements.
4. Practical consequences
a) The decision has advantages for plaintiffs: They can choose between less and more solvent defendants and between different jurisdictions. In addition, under the conditions laid down by the ECJ, plaintiffs can also claim damages from legal successors of the infringer.
b) In the case of company acquisitions, even greater consideration must be given to liability for previous infringements of competition law.
III. “Effective prosecution”: Borders under the rule of law
1. Civil law as a means of sanction
The decision goes a long way: It disregards the civil separation principle for civil law, because
„actions for damages for infringement of EU competition rules are an integral part of the system for enforcement of those rules, which are intended to punish anticompetitive behaviour on the part of undertakings and to deter them from engaging in such conduct.” (para. 45).
Thus, unlike Advocate General Wahl, the ECJ does not regard claims for damages to constitute both as a means of compensation of damages and as a means of prevention. According to para. 45 of the judgment, the ECJ is solely concerned with prevention and punishment. This contradicts the legal systems of the Member States, which leave both (general and special) prevention and punishment (retribution) to criminal law and thus set limits of criminal responsibility which are required by the rule of law in relation to criminal prosecution. The ECJ does not lose a word about its deviation from this essential legal tradition enshrined in the legal orders of all EU Member States. Instead, in its judgment it immediately turns to the question of legal succession and states that companies that are responsible for the damage caused by the violation of the Union’s competition rules must not simply evade their responsibility by restructuring. But that is the second step. The first step is to determine which companies „are responsible for the damage caused by the infringement of the Union’s competition rules“ and why. The only reason given by the ECJ why all legal persons belonging to the „economic unit“ are liable for damages is therefore the objective of prevention and punishment.
“…the right to claim compensation for damage caused by an agreement or conduct prohibited by Article 101 TFEU ensures the full effectiveness of that article and, in particular, the effectiveness of the prohibition laid down in paragraph 1 thereof.
That right strengthens the working of the EU competition rules, since it discourages agreements or practices, frequently covert, which are liable to restrict or distort competition, thereby making a significant contribution to the maintenance of effective competition in the European Union ….
As the Advocate General stated essentially … actions for damages for infringement of EU competition rules are an integral part of the system for enforcement of those rules, which are intended to punish anticompetitive behaviour on the part of undertakings and to deter them from engaging in such conduct.
Therefore, if the undertakings responsible for damage caused by an infringement of the EU competition rules could escape penalties by simply changing their identity through restructurings, sales or other legal or organisational changes, the objective of suppressing conduct that infringes the competition rules and preventing its reoccurrence by means of deterrent penalties would be jeopardised ….
It follows that the concept of ‘undertaking’, within the meaning of Article 101 TFEU, which constitutes an autonomous concept of EU law, cannot have a different scope with regard to the imposition of fines by the Commission under Article 23(2) of Regulation No 1/2003 as compared with actions for damages for infringement of EU competition rules.
In the light of all the foregoing considerations, the answer to the first and second questions is that Article 101 TFEU must be interpreted as meaning that, in a case such as that in the main proceedings, in which all the shares in the companies which participated in a cartel prohibited by that article were acquired by other companies which have dissolved the former companies and continued their commercial activities, the acquiring companies may be held liable for the damage caused by the cartel in question.”
2. Limits of the decision
As the ECJ pursues criminal law objectives with its broad “undertaking” concept in the guise of civil law, the following consequences result:
a) Procedural restrictions
Where plaintiffs assert their claims for damages not only against the persons responsible under national damage compensation rules, but against other persons who can be sued under ECJ-Skanska because they belong to the same „economic unit“ as the acting person, it must be examined, on the one hand, whether in respect of persons from this extended „Skanska circle“ of liable companies plaintiffs can benefit from the rules on the alleviated burden of proof under civil law. This is doubtful in view of the described criminal law nature of the ECJ’s extension. On the other hand, the criminal-law nature of the extension of liability to the „Skanska circle“ may give rise to further special procedural features, e.g. the application of defense rights under the law on fines, which these persons would also be entitled to in the fine proceedings against the Commission. In short, if the ECJ postulates “effective prosecution”, defendants must be given the weaponry of effective means of defense.
b) Inappropriateness of sanctions and violation of fundamental rights of uninvolved parties, in particular of shareholders
Further, the question arises as to whether defendants from the „Skanska circle“ cannot fend off liability with the argument that the criminal purposes of prevention and punishment pursued by the ECJ could not be achieved in their person:
The extension of civil liability to all (in particular also: uninvolved) companies of the „economic unit“ illuminates that the starting point of the term „economic unit“ in terms of corporate fines law also calls for strict correction:
If, in the interest of higher punishment “effectiveness”, fines can be imposed not only on the acting legal entity but also on other companies of the same „economic unit“ (group), and if, for the same reason, the calculation of the fine is no longer based on the key figures (turnover) of the legal entity concerned, but on the turnover of the entire group (Art. 23 VO 1/2003, § 81 Para. 3a, 4 GWB), this shows that EU corporate fines law replaces the limits of the legal entity by an economic approach. But then nothing else can apply to effective protection of fundamental rights: Measures must be judged where they take “effect”. . In turn, corporate sanctions have their prime effects on the shareholders. The current corporate fines practice of effectively sanctioning the shareholders, and thus persons who are not responsible for the wrongdoing, not only fails to achieve the deterrent effect that the ECJ tries to achieve. In addition, it makes it possible for those actually responsible to laugh their way up, embitters the shareholders who are wrongfully sanctioned and undermines legal peace and confidence in the legal system.
In terms of damages law, the question arises whether defendants who have not acted, but who are only sued because they belong to the „economic unit“, can fundamentally fend off liability by arguing that the prevention and punishment purposes pursued by the ECJ cannot be achieved with them and their shareholders.