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Archive for April 16th, 2021

The notion of undertaking after AG Pitruzzella’s Opinion in Sumal (case C-882/19). Towards (eventual) ‘downward’ liability for competition law breaches? (by Marcos Araujo Boyd)

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On 15 April 2021, AG Pitruzzella issued his much awaited Opinion in Sumal (not available in English at the time of writing, see here for the text in various language versions), which concerns the question of whether damages may be sought from affiliates of the entities identified in a previous public enforcement decision.

Sumal is one of the four preliminary references submitted by Spanish commercial courts in the context of the flurry of claims following the Trucks decision of the European Commission, together with case C-30/20 Volvo seeking clarification on territorial jurisdiction and Article 7(2) of Regulation (EU) No 1215/2012,  case 267/20 Volvo and DAF Trucks on the retroactivity of the Directive 104/2014 and the recently submitted case 163/21, PACCAR, on rules of evidence. These claims have been followed by multiple authors in Spain, notably Fernando Díez, Francisco Marcos and Juan Ignacio Ruiz Peris and raise many issues of interest in the field of private enforcement.

The interest on these matters of course goes beyond this country. Back to affiliate liability, as reported by Caroline Caufmann, a Dutch court has enforced a decision against an affiliate. In Germany, Christian Kersting has discussed in D’Kart a decision pointing at that direction from the Dortmund Landsgericht. I refer the curious reader to my article published earlier this year by the Journal of Competition Law & Practice (draft available on SSRN).

This post provides a brief introduction to the Opinion. The comments follow the document’s structure.

Procedure (paras 4-10). The initial paragraphs of the Opinion recall the context of the preliminary reference and the main procedural steps at the Court, which will hear the case in Grand Chamber, the observations formulated by two Member States (Italy and Spain) and the decision not to hold an oral hearing, replaced by written submissions on specific questions placed by the Court. (para 10).

Admissibility (paras 11-18). AG Pitruzzella opines that the admissibility objections raised by the defendant in the original case, Mercedes Benz Trucks España, S.L.(MBTE) should be dismissed, save in respect of the fourth question, for lack of sufficient information. That question (‘If the answers to the earlier questions support the extension of subsidiaries’ liability to cover acts of the parent company, would a provision of national law such as Article 71(2) of the Ley de Defensa de la Competencia (Law on the Protection of Competition), which provides only for liability incurred by the subsidiary to be extended to the parent company, and then only where the parent company exercises control over the subsidiary, be compatible with that Community doctrine?’) may arguably be responded anyway through the general principles on primacy and direct applicability of EU law.

General observations (paras 19-22). The Opinion proposes to address the three questions jointly and then summarises the main arguments of the parties. The interesting bit there is in paragraph 21, where AG Pitruzzella notes that the initial position of the Commission in the case was contrary to affiliate liability, a position that evolved in the last written statements, where the Commission would have conceded that the subsidiary could be made liable (i) if there is a ‘link’ between its conduct and an essential element of the infringement or (ii) if a direct claim against the parent company was impossible or excessively difficult. This second element is not discussed further in the Opinion.

The notion of undertaking (paras 23-31). This section recalls the case-law on the doctrine of ‘economic unit’ under EU competition law, starting with ICI (case 48/69, EU:C:1972:70) and stressing its functional nature. This part hovers around the idea that an ‘economic unity’ or undertaking is based on organisational, economic and legal links defined by control. A good summary, but nothing revolutionary.

The foundations of upward liability (paras 32-47). This part looks at the parental liability doctrine. This might surprise, given that this is clearly not an issue in Sumal; it could be said it would be the exact opposite. The intention is clearly to discuss ‘downward’ liability by contrast to the established notion of ‘upward’ or parental liability.

At the outset, the Opinion notes that parental liability as found in case-law might be understood to be based on two constructions (para 33). One would be that parent companies are liable because of their capacity to determine the conduct of an affiliate. Another is based on the idea that all legal entities form an economic unit.  AG Pitruzzella notes that the answer to the questions formulated in this case may determine the answer to be given, and resolutely opts for the second alternative (para 36), finding support in the recent jurisprudence of the Court which has stressed that the principle of personality applies to the undertaking, not to each legal entity (para 46). This section ends with candid comments on the evolution that is perceived in various fields of law towards some form of ‘enterprise liability’ or similar tools based on the true economic nature of groups of companies (para 47).

Economic unit and ‘descending’ liability (48-53). The discursive section on upward liability contrasts with the brief comments on the downward dimension. That is understandable, since the latter is built on the prior section. However, two elements in this part of the Opinion deserve a mention.

One is the four-step intellectual process proposed to impute a legal entity in both upward or downward situations, aimed at presenting them as identical (paras 48-52). It ultimately defends that the identification of the legal entity is just a last step in the logic process of attribution.

The other is the reliance on the General Court decision in Biogaran (case T-677/14, ECLI:EU:T:2018:910), for want of a better (ie, from the CJ) precedent. That case had been mentioned by the referring court and is helpful in defending the liability of subsidiaries with unproven knowledge of the infringement. At the same time, however, is a remarkably weak foundation for a principle with the importance of the one at stake here.

In the end, and this should be stressed, the discussion does not address ‘why downward liability exists in law’ but rather ‘whether there are logical reasons to discard it’ (para 52). By so doing, Sumal evades addressing the question as an obligation based on EU law, but as a tool that EU law would tolerate in certain conditions. It is difficult to overestimate the importance of that approach for the solution proposed to this case.

The conditions for declaring joint liability of the affiliate (paras 54-59). This is arguably the most interesting part of the Opinion. In it, AG Pitruzzella notes that, in ‘upward’ (parental) liability scenarios, the fact that the parent company determines the conduct of the affiliate suffices to impute the conduct to the former; however, in ‘downward’ liability cases, the mere existence of control would not suffice, it being necessary that the activity carried out by said legal entity is necessary for the implementation of the conduct. That would be the case where the affiliate is involved in the specific economic activity under consideration, for example, by selling the goods object of the cartel (para 57). In this respect, the Opinion relies on several UK cases starting with Provimi (fn 70) and ENI (case T‑39/07, EU:T:2011:356). As mentioned above, this link had been required in the written submissions filed by the Commission.

When explaining this logic, the Opinion argues that a subsidiary carrying activities in other areas would fall outside the functional notion of undertaking for these purposes. The consequences of this logic are difficult to anticipate and will require further reflection.

Extension of these principles to private enforcement (60-69). Paragraphs 60 ff of the Opinion move away from logic of public enforcement and build on Skanska (case C-724/17, ECLI:EU:C:2019:204). AG Pitruzzella recalls that the determination of the liable entity is directly governed by EU law and notably that it may not have a different meaning in public and private enforcement, linking the discussion in the prior sections to the case, and concluding that downward liability is as acceptable in private as it is in public enforcement.

The reliance on Skanska is understood; it is however noted that, unlike Sumal, that case was based on the principle of effectiveness, displacing national rules when it would stand in the way of EU law. In contrast, as above noted, the Opinion discusses if EU law would permit, not require, such ‘inverse’ claims. In other words – the Opinion does not advocate that EU law would impose downward liability, treating an eventual failure to do so as a breach of EU principles (as in Skanska), but proposes confirming that EU law would not impede such attribution of liability within certain conditions. Consequently, the procedural obstacles faced by claimants are acknowledged (para 68), but in no way considered a barrier that would stand in the way of the rights granted by EU law and that national courts should disarm.

While this logic is understandable, it leaves unanswered the question of what principle of law, either EU or national, would require affiliates to be held liable for these damages, despite offering a construction that would ultimately impose legal obligations on legal entities. That, of course, is just one out of many questions that arises from this case and will require further reflection.

Binding nature of the determination in the public enforcement decision (70-76). The last section of the Opinion discusses whether the determination of the legal entity made in the public enforcement decision would bind the referring court. If so, national courts would, out of respect to the decision of the Commission under Art 16 of Regulation 1/2003, be prevented from imposing liability in a follow-on case on entities other than those specifically identified in it.

This is a tricky issue on which there is limited authority. In Martinair (case T-67/11, ECLI:EU:T:2015:984, 37) the GC declared noted that the identification of an entity in the public enforcement decision would bind national courts. AG Pitruzzella does not mention that case and moves swiftly to proclaim that the national judge can determine a different legal entity, provided that that entity meets the above criteria of participation in the infringement (para 74). At this point, the Opinion quotes the Commission as having accepted this logic in its written submissions, creating the impression that these statements may have played a role.

Conclusion The Opinion concludes that, in a claim for damages as that before the national court (ie, a follow-on claim), a legal entity may be held liable despite the fact that only its parent company has been sanctioned by the Commission provided that the economic, organisational and legal links at the time of the infringement have been established, and that the conduct of the controlled entity has contributed in a substantial manner to the illicit behaviour and to the effects of said infringement.

The matter is now laid before the Grand Chamber of the Court of Justice. An eventual acceptance to the proposals formulated by AG Pitruzzella would facilitate private enforcement claims. Some additional clarity on the requirements that affiliates must meet to be liable in these situations will be needed over time. The potential weakening of the binding nature of the identification of the liable entity seems a price the Commission is happy to pay. However, questions shall be raised on the legal basis for this solution. Time, and indeed the Court, will tell.

Written by Alfonso Lamadrid

16 April 2021 at 9:35 am

Posted in Uncategorized