Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Of undertakings, legal entities and groups of companies. The CJEU’s judgment in Sumal (C-882/19)

with 3 comments

(Guest post by Marcos Araujo Boyd)

On 6 October 2021, the Grand Chamber of the CJEU issued its much-awaited decision in respect of the legal entities against which follow-on claims may be made (link here)

This decision that will be remembered for reasons way beyond the liability of subsidiaries in a follow-on cartel claim. As suggested by the appointment of a Grand Chamber, the Court soon realised that it would have to reconsider a particularly convoluted area of EU competition law:  the theory of the undertaking or economic unit and its relationship with legal persons and groups of companies. The answer provided may be ranked alongside Hydrotherm, Viho, Dansk Rørindustri , Confederación Española de Estaciones de Servicio , Akzo Nobel or Skanska in its importance on the construction of the undertaking as a legal concept in EU competition law.

The discussion follows the order of the arguments in the judgment starting from its paragraph 31, after having dealt with procedural and admissibility issues. For a fuller discussion on the context of the judgment, the reader is invited to check my previous guest post on AG Pitruzzella’s Opinion.

The opening statements: On Giant’s Shoulders (paras 32 to 37)

After rephrasing the three initial questions as whether a victim may indifferently sue a parent company sanctioned by the Commission or an affiliate provided both entities constitute an economic unit, paragraphs 32 to 37 of the judgment recall the jurisprudence of the Court on private enforcement. The arguments feature Skanska prominently, stressing that the determination of the liable entity is a matter of EU law only, and abundantly noting the link between public and private enforcement.

While there is little new in this section, these references usefully reveal the reluctance of the Court to heed to the temptation of facilitating private claims under the principle of effectiveness or, as suggested in para 52 of AG Pitruzzella’s Opinion, by admitting that national courts affirm it without that being required by EU law. Rather, the Court builds its arguments on private enforcement over the strong shoulders of public enforcement, dismissing by implication potential divergences between the two tools. That perspective enables it to rely on its rich public enforcement case-law in the sections that follow.

The Centrality of the Notion of Undertaking (paras 38 to 44)

Following the discussion on public and private enforcement, the Court moves on to a second constitutional stepping stone, constituted by the notion of undertaking. Quoting earlier jurisprudence, the Court depicts it as ‘an autonomous concept of EU law’ that designates ‘the perpetrator of an infringement (…), who is liable to be punished’ and ‘the entity on which the Commission may impose a fine’, contrasting it with other concepts such as companies or legal persons, and observes that this notion is employed both in primary and secondary legislation, especially the Damages Directive 2014/104. It then recalls the jurisprudence on the notion of undertaking by recalling Imperial Chemical Industries, Confederación Española de Estaciones de Servicio, the 2009 and 2017 Akzo Nobel judgments and Knauf Gips before moving on to the application of the principle of personal responsibility to the undertaking and not to legal entities, an apparent oxymoron that has, not without some reaction from various AGs, featured prominently in EU competition law since ETI. That recollection ends with a surprising, yet reiterated, principle of EU competition law used in public enforcement since at least Siemens Österreich whereby the joint and several liability amongst the entities of a single economic unit applies ipso iure or automatically, no decision to that effect being actually needed, an argument that resonates differently in the context of private enforcement than when discussing a case where the separate entities have been identified in a decision following a procedure. That is, in any event, inevitable given the logic of parallelism between public and private enforcement already noted.

The consequence of the above is clear: upward and downward liability are placed on equal footing, both resulting from the very nature of the undertaking as defined in EU law, and not as a result of control or agency theory. But thar is not the end. Keep reading.

Undertakings within Groups of Companies? (paras 45-50)

After reaching the above conclusion, the Court moves on to a correction required by the problem identified already by AG Pitruzzella: the link that should exist between the legal entity against which the claim is made and the undertaking that is initially liable. It will be recalled that the AG had proposed to require an involvement by the subsidiary on the specific economic activity under consideration, for example, by selling the goods object of the cartel (see para 57 of the Opinion).

Quoting the AG’s Opinion, the Court follows its logic with a significant twist. Taking conglomerate groups as an example, the Court argues that groups of companies may contain various ‘economic units’ (or undertakings, although the judgment avoids that term in this context). This would be the case where the groups are active in ‘several economic fields having no connection between them’. It even notes that, in those conglomerate groups, ‘the same parent company may be part of several economic units made up (…) of itself and of different combinations of subsidiaries all belonging to the same group of companies’, thereby affirming that a group of companies, all linked by control, may actually contain several separate ‘economic units’.

This logic is used to solve the absurdity that a subsidiary ‘could be held liable for infringements committed in the context of activities entirely unconnected to its own activity and in which they were in no way involved, even indirectly’ (para 47). However, its impact is far reaching beyond the matter at hand, changing the notion of undertaking as hitherto regarded by supplementing the presence of ‘control’ with ‘sharing an economic field’. Wow.

It is difficult to overestimate the relevance of this logic. From now on, groups of companies may, at least where their activities substantially differ, be understood to integrate various economic units or undertakings. Worldwide turnovers used in the calculation of sanctions may need to be determined separately for each economic entity. One can not help but to note the divergence this represents with the notion of undertaking as used in the EUMR, where conglomerate groups would remain to be a single ‘undertaking’. It might even be wondered if Article 101 could apply to agreements between separate ‘economic units’ of a conglomerate group, a door that might have appeared to have been closed in Ecoservice not that long ago.

Other questions to be clarified in future cases will look at what standards may be used to tell an activity from another. Sumal has been cautious in presenting this in the context of conglomerate groups where the legal entities act in ‘several economic fields having no connection between them’, That said, it will be interesting to follow what intensity of ‘connection’ is relevant for these purposes.

That said, the answer given by the Court adequately resolves the problem of inverse or downward liability in a consistent way which is firmly anchored on the notion of undertaking. It also provides a hook to resolve the inconsistency resulting from Recital 22 of the Merger Regulation, which appeared to recognise the existence of separate undertakings within public conglomerates, an option arguably unavailable for private ones.

What About Rights of Defence? (paras 51 to 67)

Paragraphs 51 to 67 of the judgment address several distinct issues that arise when a legal entity that has not been heard in a public enforcement procedure is held liable on the basis of a decision it has not been able to contest as a separate legal entity.

An essential clarification here is that while undertakings, as above noted, are the addressees of (most) competition law provisions, the Court does not apply that logic to the exercise of rights of defence, which impliedly pertain to legal entities. That apparent inconsistency has a long tradition in EU competition law (see for instance para 57 of the 2009 Court decision in Akzo and is not questioned in the judgment.

That said, the Court tries to balance here the rights of defence (of legal entities), the binding nature of the determination of an infringement by the Commission (which should operate even against legal entities not heard in that procedure) and the legal consequences (if any) of the identification of one or other legal entity in the public enforcement decision. Briefly the following may be said about each of these.

On rights of defence, the Court notes that, for a subsidiary not identified in the public enforcement decision to be liable, the victim of the cartel must establish ‘the existence of a specific link between the economic activity of that subsidiary and the subject matter of the infringement for which the parent company was held to be responsible, that subsidiary, together with its parent company, constituted an economic unit.’ In that situation, ‘the subsidiary company must be able to refute its liability for the harm alleged, inter alia by relying on any ground that it could have raised if it had participated in the proceedings brought by the Commission against its parent company which led to the adoption of a decision by the Commission’ (para 54). Of course, in the event no public enforcement decision by the Commission existed (this is, in a standalone claim), that entity would also be able to dispute the very existence of the infringement.

Moving on to the binding nature of the determination of an infringement by the Commission (as opposed to the participation of the entity in it), the Court confirms that the subsidiary could not challenge these findings, despite being apparent that they may adversely affect it. In that respect, the Court argues by way of analogy that in the event of a repeated infringement (a logic which applies to undertakings and not to legal entities), case-law permits aggravating a fine on an entity that had not participated in the procedure leading to the initial sanction (para 59). This argument is, of course, questionable, as it is whether the subsidiary may attempt a preliminary reference discussing the validity of the decision (wondering here if a Textilwerke Deggendorf-type argument would stand in the way).

 Finally, on the third element (the relevance of the absence of the subsidiary in the decision of the Commission), it would appear that this was raised as a result of the GC’s declaration in Martinair that national courts should not question the identification of the legal entities in the public enforcement decision. The CJEU departs from that claim and holds that this identification, born out of discretion (set out in crude terms in para 63, ‘the Commission may freely choose to hold liable for an infringement, and to punish by the imposing a fine, any legal entity belonging to an undertaking that participated in an infringement of Article 101 TFEU’), does not impede national courts from calling upon a subsidiary.

The fourth question – is National Law Valid? (paras 68 to 75)

The final question, which the Court decided to respond separately, concerns whether national rules which provided for parental liability but do not contemplate downward liability should be regarded as not conforming with EU law.

The question would appear obvious given the above. Indeed, if national courts can choose any legal entity within an ‘economic unit’ as liable in a follow-on claim, national rules standing in the way should be disregarded by them. In this case, however, the issue was disputed from the standpoint of the facts, i.e., whether national law required that, leading AG Pitruzzella to propose that question should not be addressed. The Court chose otherwise, perhaps to provide guidance on a situation that might occur in other countries too, removing any uncertainty as to whether the liability of a subsidiary is required by EU law or merely not opposed by it, as earlier discussed.

The answer by the Court is to invite the national court to attempt a conforming interpretation of national rules, noting in passing that the Spanish government would have argued that was possible in this event. That said, were that reading not possible, EU law would stand in the way of such national rules.

Final Considerations

The judgment delivered today is remarkable on many accounts. As any Grand Chamber decision, it is a step that required a particular reflection. Making sense of the evolution in case-law on the notion of undertaking, the relationship between public and private enforcement, and the procedural rights of legal entities was no easy feat. And while intuitively convincing in the light of earlier case-law, downward or inverse liability raised difficult questions, especially on how to identify the circle of subsidiaries that may be called to bear liability, the role of EU law as requiring or merely accepting such indirect liability and the incidence of the binding nature of a decision by the Commission on entities not having participated in the public enforcement procedure.

The decision can and will be scrutinised and criticised with the benefit of reflection in coming days and weeks. It does have rough ends and far-reaching implications that go way beyond the specific questions at stake. One would particularly note the risk of divergence in the notion in the field of merger control and other areas of competition law. That said, the judgment represents an honest attempt to structure a difficult area of law, building on a consistent body of law that is giving birth to a new way to understand attribution in the field of competition law.

Written by Alfonso Lamadrid

7 October 2021 at 3:39 pm

Posted in Uncategorized

3 Responses

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  1. What the Court draws is a new definition of the notion of undertaking. I think the crux of the problem is that the ECJ wanted to link the actus reus and the liability of the legal entity. There lies the rub, because it creates a fragmentation of the notion of undertaking that the ECJ has forcefully refused to recognize (since the holding company can be held liable without any fault/negligence).

    The second element of the new notion of undertaking, namely “a specific link between the economic activity of that subsidiary and the subject matter of the infringement for which the parent company was held to be liable” (the raison d’être behind this specific link is in fine the notion of actus reus) calls into question the reasoning of the Court, especially in the context of merger control or where the EC transfers liability to the holding company through presumptions. In these cases, where is the actus reus?

    Potentially, one can argue that top-bottom is not equal to bottom-up (only the head can think).

    This makes, however, little sense because this shows that it’s easier to (i) incur and (ii) aggravate the liability of the holding company (via the 10% threshold) than to only incur the liability of a company. The presumptions being so easily fulfilled and hardly rebuttable (probatio diabolica) that the fact that the ECJ dares to recognize the paramount importance of a kind of actus reus seems at odds with its previous case-law.
    As to intra-group agreement, this is clearly the Pandora box, more red tape as uncertainty becomes the norm.

    edouard

    8 October 2021 at 1:18 pm

  2. […] was hinted at by Marcos Araujo Boyd, the Court may have sparked chaos in the case-law on the identification of an ‘undertaking’, […]

    • The Court has, clearly, opened the Pandora box . This judgment opens so many questions. If you have an agreement between subsidiaries held by the same parent but carrying out different activities, will it come under the scrutiny of article 101? As, according to the new understanding, it is an agreement between different undertakings.
      Where does this leave the Akzo presumption? We might face situations where the parent company is not held liable for an infringement of the subsidiary given that it only has a minority share but a subsidiary might be held liable for the parent’s conduct, despite a minority share, because they carry out the same or a linked economic activity.
      As, has been noted above, it also opens a breach with the merger regulation.
      Furthermore, the reasons (presented by the Court and its’ Advocate Generals throughout the years in previous case law) that justify holding a parent company liable do not serve to justify the attribution of liability to a subsidiary. (The idea that the parent company pulls the strings, it has power over the subsidiary, it has the responsibility of ensuring compliance with antitrust law. Holding parent companies liable serves the purpose of deterrence. It is also necessary to prevent the evasion, through corporate restructurings or undercapitalization, of the payment of antitrust fines. These justifications cannot be used to hold a subsidiary liable. The principle of effectiveness is also a weak justification as injured parties may always claim compensation against the parent company in the place they suffered the damages (maybe they will only face increase costs and a longer procedure).

      Catarina de Fraipont

      13 October 2021 at 10:39 am


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