The Dark Before the Dawn

The Dark Before the Dawn

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Increased Risks for International Cartels in Europe

The fight against international price-fixing and market-sharing cartels has become a top political priority in Europe. Over the last five years, the European Union and some of its member states have considerably tightened the system of cartel enforcement. Facing increasing risk for their company and senior management, legal executives of companies active in Europe need to make sure that adequate mechanisms to control cartel risks are in place.

Cartel enforcement in Europe is marked by four concurrent trends. First, the number of international cartels detected by the European Commission and the level of the fines imposed on participating companies is increasing dramatically. Second, member states of the European Union have started introducing or enforcing legislation that calls for criminal punishment of executives who conspire on behalf of their companies. Third, aggrieved customers’ actions for damages against cartel members are encouraged and facilitated. And fourth, there is increased coordination and interaction between the cartel enforcement in Europe and cartel enforcement of other countries, notably the United States.

More cartels detected, higher fines

Cartels are illegal secret agreements between competitors to fix prices, share markets, restrict output, or engage in bid-rigging. The European Commission investigates international cartels, which today often include companies from Europe, the United States and Asia. It can impose fines on each participating company of up to 10% of its total sales, regardless of the sales achieved of the product in question.

Cartel busting is a top political priority for the European Commission and its Competition Commissioner Mario Monti, and they are serious about it. The number of staff members exclusively dealing with cartels continues to increase. A new European law will strengthen the European Commission’s investigative powers as of May 2004, notably by giving it the authority to search private homes of company executives for incriminating documents. The focus on cartels has led to 19 cartel decisions in 2001 and 2002, compared to 25 during the entire ten year period before. European Commission officials expect an average of at least 10 cartel decisions annually in the coming years.

A main cause for the higher number of detected cartels is the European leniency program of 1996, revised in February 2002. Under the leniency rules, which now closely follow the US model, a company can completely avoid a fine if it voluntarily provides substantial information to the European Commission on a specific cartel. Full immunity from fines is only available for the company that is “first in” with the Commission. Companies that provide information at a later stage can only obtain a reduction of the fine. The “first in - full immunity” rule creates a powerful incentive for each cartel member to blow the whistle. More than 20 leniency applications for full immunity have been submitted under the new rules in a little more than one year.

To strengthen deterrence against potential cartel activities, the European Commission has decided to dramatically increase the amount of fines for cartel members. In 2001, fines totaled €1.8 billion. This was more than the sum of all fines during the three preceding decades. Almost half of the 2001 fines were imposed on the members of the vitamins cartel. The €462 million fine for Swiss vitamin maker Hoffmann-La Roche stands as the largest fine ever imposed on a single company. In 2002, total fines were approximately €1 billion.

Risk of personal punishment for company executives becomes real

Increasingly, company executives who sponsor a cartel on behalf of their company face a real risk of imprisonment or other personal consequences in Europe. Unlike in the United States and Canada, this risk has so far largely been absent in Europe. Criminal sanctions fall into the reserved domain of the European Union’s member states and their laws have in the past not provided for such sanctions or they were not imposed in practice.

The United Kingdom is the first large member state that has taken a decisive step towards criminal punishment. Under a new law coming into force this year, individuals who “dishonestly agree” on cartel behavior on behalf of their companies can be imprisoned for up to five years. In addition, executives can be banned by disqualification order from serving on company boards for significant periods of time. The Irish competition act also calls for imprisonment. In France, Germany and Spain, sponsoring a cartel can lead to individual fines, but not normally to imprisonment. In these and other member states, however, discussions to introduce imprisonment are under way or can be expected, and a trend towards stricter enforcement can be anticipated.

With criminal sanctions in place, cartel companies’ executives, regardless of their nationality, risk prosecution in the UK if the cartel was sponsored from the UK. It appears that making phone calls or sending e-mails from the UK territory could be sufficient to trigger UK jurisdiction. It remains to be seen, however, what type of cases the UK authorities will prioritize.

Criminalization radically changes the face of cartel enforcement. Executives will be treated more like ordinary criminals. They can be subject to wiretapping, video-surveillance and other investigative methods employed by police forces. The indicted executive will normally have to appear in court, possibly before a jury, and often be confronted with testimony from other executives from its own company or competitors.

Criminalization of cartels on a member state level also aggravates or creates questions of high practical importance that are not yet satisfactorily resolved. The rules for information exchange between the European Commission and national authorities are not yet clear. For example, can the European Commission use evidence obtained from a wiretapped executive in the UK for its investigation against the company? Information exchange also endangers the effective protection of business secrets. Other important issues are, for example, the different standards of recognition of the attorney-client privilege, double jeopardy in case of prosecution in several member states, the protection of the rights of defense and other fundamental rights, and the mutual recognition or coordination of leniency programs.

Private actions for damages

Cartel companies face an additional financial risk from claims for damages or other compensation by customers who bought at inflated cartel prices. Damages claims, although possible in most member states, have not played a major role in Europe so far. This sharply contrasts with the situation in the United States, where a governmental cartel investigation is practically automatically followed by damages litigation.

Private damages issues fall into the exclusive jurisdiction of the European Union’s member states. The European Commission campaigns for more active private enforcement as an important additional deterrent against potential cartels. The new UK law facilitates private actions in two ways. Claimants can turn to the Competition Appeal Tribunal, a specialized body for these cases, to have their claims assessed. The new UK law also introduces a consumer representative action, a kind of consumer class action.

Increased international cooperation and interaction

The pursuit of international cartels has many international dimensions, notably across the Atlantic. Cartel enforcement agencies around the world coordinate their investigations more closely than ever before, leading to simultaneous surprise inspections (“dawn raids”) by the European Commission and competition authorities in United States, Canada, and Japan.

The international center for private actions for damages may increasingly become the United States, where litigation is more attractive for the plaintiffs because they can obtain treble damages and use the class action procedure. The jurisdictional question is, however, whether customers can bring an action in US courts for damages suffered in commercial transactions carried out outside of the United States. Some US courts have allowed such actions provided that the cartel as such, but not necessarily the specific transactions with the claimants, involved the United States. This issue is currently pending before the US Supreme Court.

Private plaintiffs in US courts often try to use the US discovery process to retrieve self-incriminatory statements made by cartel members to the European Commission under its leniency program. The European Commission opposes “discoverability” of such statements, as this would discourage companies from submitting information to the European Commission. Nevertheless, US courts have in some cases ordered discovery. It is uncertain whether the European Commission’s new policy of accepting oral rather than written statements under the leniency program will resolve the issue.

A final international dimension is in the criminal field. US authorities sometimes request other countries to extradite company executives. However, the dual-criminality requirement in the UK and other European Union member states prohibits extradition if the alleged behavior is not punishable in the country to which the request is addressed. The criminalization of cartel behavior in the UK will allow extradition from the UK to the United States in the future.

How to minimize cartel risks in Europe

As a consequence of these trends, international cartel behavior implemented in Europe no longer carries less risk than cartel behavior implemented in the United States. European governmental enforcement has stepped up, and private enforcement may largely take place before US courts. Companies with business activities in Europe should therefore cover antitrust issues in their internal policy guidelines. Business executives should be trained and informed about antitrust risks. It appears that a good number of US executives have participated in such antitrust training programs, but not a sufficient number of European executives. Training should be repeated on a regular basis.

In addition, legal executives should introduce a clear internal policy on legally privileged documents. US lawyers should be aware that the European Commission recognizes legal privilege only for company communication with outside counsels who are members of a European bar. Communication with US outside counsel or with any in-house counsel is not considered privileged and can be retrieved by the European Commission in cartel investigations. It may be advisable to set up sensitive documents as communication with European outside lawyers.

If there are indications that their company may be involved in a cartel, legal executives should initiate an internal investigation and consider as soon as possible applying for leniency with the European Commission and national authorities, at least if they have leniency programs for executives’ behavior.

Surprise inspections by the European Commission pose distinct challenges, because the right or wrong on-the-spot reaction of company employees can have major consequences. It is advisable to have an action plan ready and instruct company employees in advance how to react in case of a surprise inspection.

Finally, in any dealings with specific cartel issues, international companies should take an international perspective and be aware that European, US and Asian antitrust authorities closely coordinate and inform each other and that more generally the enforcement of international cartels has become global.

Suggestions for additional graphics:

Fines imposed on companies by the European Commission in horizontal cartel cases (in €)

1999

2000

2001

2002

Total fines imposed

106 million

117 million

1.8 billion

945 million

Largest fine for one company

13.5 million

47 million

462 million

250 million

Fines imposed on companies in US ($) for Sherman Act violations

FY 1999

FY 2000

FY 2001

FY 2002

Total fines imposed

960 million

303 million

271 million

75 million

Largest fine for one company

500 million

53 million

134 million

54 million

Number of European Commission decisions against horizontal cartels

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

5

0

6

1

2

0

5

2

3*

10

9

* Includes one re-adopted decision originally made in 1990.

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