The changing face of parental responsibility in competition law

In recent decades, the European Court of Justice (ECJ) and the European Commission have been on a straight path to completely blur the distinction between various legal entities in a group of companies when it comes to liability for breaches of competition law. Essentially, legal entities within a group of companies can be held liable for each other’s infringements of competition law if they are connected through a relationship of so-called decisive influence. This creates de facto group liability – a stark contrast to the concept of limited liability in civil law.

The legal justification for this is that EU competition law applies to undertakings and not to companies. Undertakings are seen as single economic entities. This concept, thus, focuses on the economic and not the legal reality.

Recently, the concept of parental liability, where a parent company is held liable together with its subsidiary, has found its way into the evolving area of private enforcement of competition law. It is also extending its reach to civil liability in damages actions before national courts.

Below we will set out which steps the ECJ has taken to continuously expand the scope of parental liability, and we will provide an overview of some important practical implications.

The Ever-Expanding Scope of Parental Liability

The first judgments establishing that parent companies could be held liable for infringements of competition law of their subsidiaries were written decades ago. All these judgments seemed to provide that there needed to be some form of involvement by the parent company for it to be held liable.

In the Akzo judgment, the ECJ clarified that this is not necessary, thus creating a helpful tool for the European Commission (and some national authorities) to hold parent companies liable for infringements committed by their subsidiaries.

The Akzo judgment is known for the (rebuttable) presumption that if a parent company holds, directly or indirectly, all or virtually all of the capital in a subsidiary that has committed a competition law infringement, it can be held liable. The ECJ implies that this presumption can be rebutted, but it remains to be seen whether this is really the case, as up until now not one company has been able to rebut the presumption; indeed, this seems to require probatio diabolica. Moreover, the presumption has been applied to parent companies that do not hold all capital in their subsidiaries or merely hold all voting rights.

In addition, the ECJ has held in E.I. DuPont and Dow that in joint ventures where each parent company holds 50 percent of the shares, the parents can be held jointly and severally liable for infringements committed by the joint venture company. From the Toshiba judgement, it follows that even in the case of shareholdings under 50 percent, parent companies can be held jointly and severally liable. In Versalis, the ECJ even went as far as deciding that it is legitimate to hold liable a sibling company of an infringer of competition rules if the business unit that has committed the infringement has been transferred from one subsidiary to another subsidiary of the same parent.

The most recent clarifications of the reach of the concept of parental liability concern judgments of the ECJ in preliminary reference cases on parental liability in civil damages cases such as Skanska and Sumal and seem to suggest that subject to certain conditions the single economic entity doctrine may also be applied to liability for damages in private follow-on damages cases, where customers of infringers of competition law try to obtain compensation from the companies that have been fined. In Sumal, the ECJ even held that under certain circumstances subsidiaries could be held liable for infringements of parent companies.

Practical Implications

FINES

Application of the (single) economic entity doctrine has important implications for the public enforcement of EU competition law. According to settled case law, when an entity infringes competition rules, it falls, according to the principle of personal responsibility, to that entity to answer for that infringement. Personal liability entails that, in principle, an infringement of competition law is to be attributed to the natural or legal person who operates the undertaking which participates in the infringement (in other words the principal of the undertaking is liable). Under the (single) economic entity doctrine, the anti-competitive behavior of a subsidiary is also attributed to the parent, in particular where, although having a separate legal personality, that subsidiary does not decide autonomously upon its own conduct on the market, but carries out, in all material respects, the instructions given to it by the parent. Whenever possible, the European Commission and certain national competition authorities in the EU will, therefore, hold a parent jointly and severally liable with its infringing subsidiary. The most obvious practical implication of parental liability for competition law infringements, therefore, is that in groups of companies, parent companies can be held jointly and severally liable for the infringements of their subsidiaries. Moreover, the 10 percent annual turnover cap that applies to fines for infringements of competition law applies to the whole group of companies belonging to the parent company, therefore, considerably expanding the potential limit on the amount of fines.

DAMAGES

In addition to this far-reaching effect of parental liability regarding fines, recent case law seems to indicate that the single economic entity doctrine can also apply to civil damages actions. However, this case law indicates that the concept is more limited in private damages actions and still poses various questions with regard to the exact scope of the concept in this domain. Nevertheless, groups of companies should be aware of these implications, which may even lead claimants in damages cases to pick a company within the group of a competition law perpetrator that is located in a so-called claimant-friendly jurisdiction (this is sometimes called forum shopping) – with the attendant potential to increase exposure to civil damages actions.

DUE DILIGENCE AND COMPLIANCE

Cartels are naturally hidden from sight. That also makes them difficult to spot in traditional due diligence exercises. Considering the considerable risks that parental liability poses, it is, therefore, wise to carry out a specific antitrust due diligence (including e-discovery) when integrating a new company into an existing group of companies. Moreover, risks can be managed to a certain extent by taking them into account when negotiating warranties and indemnities. Once on board, it is important to integrate the company into the group-wide compliance program, which should encompass all group companies.

Conclusion

Competition law infringements lead to considerable parental/group liability risks. Therefore, groups of companies should have group-wide compliance systems in place and should be aware of the potential risks when acquiring new companies. Moreover, the legal developments regarding risks from damages actions will need to be monitored.