The Pilkington judgment: The Court of Justice clarifies the criteria for setting fines for cartels
Introduction
Article 23(2) of Regulation (EC) 1/2003 and the
European Commission’s Setting Fines Guidelines[1] lay
down the criteria for the determination of fines for the infringement of the EU
Competition rules. Not astonishingly, one of the most often debated issues in
competition litigation is whether the Commission has correctly applied those
criteria, particularly in relation to cartel cases where the amounts of
penalties may be hefty. In the judgment recently handed down in Pilkington[2],a follow-on case of the Commission’s cartel
decision in Car Glass[3],
the Court of Justice of the EU (CJEU) clarified which turnover of cartelists
and which exchange rate to convert such turnover into euro should be used for
the purpose of calculating the competition fines. The applicants, a numbers of
firms belonging to the Pilkington group (thereinafter the Pilkington group),
contended that the Commission, and later the General Court of the EU (GC) that
upheld the Commission infringement decision, had misapplied the relevant rules
in Article 23(2) of Regulation (EC) 1/2003 and in the Setting Fines Guidelines.
The CJEU, however, rejected the ground of appeals submitted by the applicants taking
the view that the amount of the fine levied and the methodology followed by the
Commission to arrive at that amount were correct.
The facts of the case
In 2008 the Commission closed the antitrust
investigation opened in Car Glass finding
that the Pilkington group, together with other manufacturers, cartelized the
market for automotive glass parts. More precisely, the members of the cartel agreed
to divide up the market and exchange sensitive commercial information among
them with the view to crystallize their market positions. The cartel took place
over the March 1998-September 2002 period. The Commission imposed on the
cartelists fines totalling up to about EUR 1.35 billion. This was one of the
highest fines ever imposed in the context of the enforcement of Article 101
TFEU. Incidentally, it may be worth noting that the Commission started the
investigation against the cartel on the basis of the facts reported by an
anonymous whistleblower.
The Pilkington group was given a fine of EUR 370
million, later reduced by the Commission to EUR 357 million to correct certain
calculation errors previously made. Notwithstanding that, and unsurprisingly, the
Pilkington group challenged the decision of the Commission before the General
Court of the EU (GC). In support, the Pilkington group pleaded, amongst other
things, that the Commission had wrongly determined the amounts of the fines because
it had misapplied the relevant criteria for the calculation of fines. By a
judgment made on 17 December 2014[4],
the GC rejected all the pleas of the Pilkington group that appealed that judgment
before the CJEU. The grounds of appeal submitted the Pilkington group before
the CJEU can be bogged down to the question whether the setting fine
methodology employed by the Commission in Car
Glass was inadequate.
The judgment of the CJEU
Point 13 of the 2006 Fining Guidelines lays down that the
basic amount of a competition fine is to be determined by the Commission by
reference to the values of the condemned undertaking’s sales of goods or
services to which the competition infringement directly or indirectly relates. By
the first ground of appeal, the Pilkington group raised the question as to
whether the principle in point 13 of the 2006 Fining Guidelines implied a
causal connection between the cartel arrangement and the individual sales
contributing to the turnover of the cartelists to be taken into account. The
Pilkington group was of the view that this was so. Accordingly, the applicants
argued that the Commission had to disregard the sales unconnected to the
collusive agreements such as the sales made by the cartelists pursuant to the
contracts concluded before the implementation of the cartel and that were not
re-negotiated during the infringement period. Importantly, had the Commission not
taken into account the revenues generated by those sale, the fines imposed on
the Pilkington group would have been EUR 49 million lower.
The CJEU stressed that the rationale underlying the
principle in point 13 of the 2006 Fining Guidelines is that the amount of the
fines should reflect the economic significance of the competition breach and the
size of the infringer. Therefore, it would be contrary to this objective if the
principle in point 13 were interpreted narrowly and applied only to the revenues
generated by the sales actually covered by the cartel arrangement. In the view
of the CJEU, the GC correctly included the sales contested by the Pilkington
group in the value of sales to be considered for the purpose of setting the
basic quantum of the fine in accordance with point 13 of the 2006 Fining
Guidelines. In fact, taking the contested sales into account ‘was justified in
view of the scope of cartel, its mode of operation and its overall objective of
stabilizing market shares, with the result that it was not necessary to collude
on each supply contract in order to achieve that objective’[5]. The
overall objective of the cartel was to allocate the supplies of automotive
glass among the cartelists with regard to existing and new contracts. The allocation
arrangement covered all the activities of the cartelists on the relevant
markets. Therefore, also the sales resulting from contracts made before the
infringement period and not renegotiated during that period fell within the
scope of the cartel. As a result, pursuant to the principle set out in point 13
of the 2006 Fining Guidelines, the revenues generated by those sales had to be considered
when setting the basic amount of competition fines.
The second ground of appeal focused on Article 23(2)
of Regulation 1/2003, which lays down that competition fines cannot exceed the
cap of 10% of the total turnover generated by the guilty firms in the business
year before that in which the competition breach occurred. The Pilkington group
objected to the methodology followed by the Commission that, in order to convert
the Pilkington group’s turnover from pounds into euros, applied the average
exchange rate calculated by the ECB over the April 2007-March 2008 period or
the business year before that of the infringement decision. According to the
Pilkington group, instead, the Commission should have applied the exchange rate
at the date of the infringement decision. Importantly, the Pilkington group
claimed that the fine imposed on it was about EUR 40 million higher than the 10%
statutory cap calculated with the application of the pound/euro rate exchange
of the date of 12 November 2008. In practice, the Pilkington group argued that
Commission had to apply a ‘looking forward’ approach to identify the relevant
exchange rate rather than the ‘looking back’ approach applied in Car Glass.
The CJEU started its analysis by pointing out that
Article 23(2) of Regulation 1/2003 does not provide for any guidance on which
exchange rate to apply to determine the 10% ceiling. The aim of the cap is to prevent
the imposition of competition fines that infringers will be unable to pay. In
that regard, the GC has correctly said that the cap in Article 23(2) should be
determined by the reference to the economic reality emerging from the business
year preceding the adoption of the infringement decision. Indeed, the turnover
figure for that year was likely to be a suitable proxy of the financial
capacity of the penalized firm at the point of time in which the competition
breach was found. The method to assess the financial capability of an
infringing firm on the basis of the average exchange rate in the business year
before the infringement decision was more in line with the EU Competition law than
the ‘looking forward’ approach based on the exchange rate at the date of the
infringement decision. Therefore, the ‘looking back’ approach followed by the
Commission and upheld by the GC was more likely to reflect the economic reality
of the business year preceding the adoption of the infringement decision.
The CJEU also noted that the method applied by the
Commission incorporated an exchange rate that was ascertainable before the date
of the infringement decision. And, also the statutory cap of the fine could be
determined in advance. That said, the CJEU rejected the arguments of the
Pilkington group concerning the harmful consequences that monetary fluctuations
might have on the calculation of the statutory ceiling of Article 23(2) of
Regulation 1/2003 due to the exchange rate applied by the Commission. Indeed,
it was the application of the average historical rates during the year before
the competition breach that was more likely to mitigate or neutralise such
harmful consequences. On the contrary, the exchange rate at the date of the
infringement decision was less suitable to minimize those consequences. In
addition, the currency risk was inherent in the activity of each firms whose
accounts were kept in a currency other than euro. It could not be said that the
currency fluctuations discriminated against firms with no-euro accounts in
favour of the firms with euro accounts. Rather, the currency fluctuations were an
element of chance to which the firms with non-euro accounts were exposed and
from which advantages or disadvantages might come to them.
Finally, by the third ground of appeal, the Pilkington
group argued that the Commission breached the principles of equal treatment and
proportionality when it imposed on the Pilkington group a fine proportionally greater
than those levied on the other cartelists with more diversified activities. The
CJEU dismissed these arguments, too. It ruled that the principles of equal
treatment and proportionality were not violated when ‘an undertaking, the
activities of which are more focused than others on the sale of goods or
services connected directly or indirectly to the infringement, may receive a
fine which represents a proportion of its overall turnover that is greater than
that represented by the fines imposed respectively on each other of the other
undertakings’[6].
Because the setting fine methodology adopted by the
Commission was not based on the overall turnover of the competition
infringement, it followed that disparities between firms as to the ratio
between overall turnover and fine amounts were not disallowed. Concurring with
the GC, the CJEU highlighted that EU Competition Law did not require the
Commission to make sure that the amounts of levied fines reflected the differences
between the condemned firms as to their overall turnover. The disparities
between undertakings as to the proportion of the quantum of the levied fine to
the overall turnover of the firm did not constitute a sufficient justification
for departing from the methodology adopted by the Commission and applied in the
Car Glass case. Doing otherwise would
result in conferring an advantage on the least diversified firms on the basis
of criteria that were unconnected to the gravity and duration of the
infringement. By the same token, the CJEU reminded that in order to set the
amounts of fines, the Commission did not need to look at the economic situation
of the firms, particularly at its financial capacity. If the Commission did so,
the firms less adapted to market condition would be given an unfair competition
advantage.
Therefore, the CJEU dismissed all the grounds of
appeal submitted by the Pilkington group, upholding the judgment of the GC.
Then, the CJEU confirmed that the Commission correctly calculated the amounts
of the fine imposed on the Pilkington group in the Car Glass decision.
Commentary
First, In Pilkington
the CJEU constructed in a purposeful way the concept of the value of sales in
point 13 of the 2006 Fining Guidelines. Embracing the narrow interpretation of sales
advocated by the applicants would be contrary to the objective pursued by point
13 of the 2006 Fining Guidelines and would lower the deterrent effects of
competition fines. In that regard, the CJEU took in great consideration the
nature and objectives of cartels. Typically, most of cartels, included the one
detected in Car Glass, have as
purpose to crystallize the market shares of the participants. If the
stabilization effect covers the whole activity of the cartelists, so the
argument run, the Commission was right to consider all the sales made by the
cartelists in the relevant markets affected by the collusion, including those
made before the infringement period. Further arguments in favour of the approach
taken by the Commission were identified by AG Kokott in the wide wording of
point 13 of the 2006 Fining Guidelines. In her view, the reference to all goods
or services supplied by the cartelist to which the infringement directly or
indirectly relates supported an extensive interpretation of the concept of
sales. She also said that to ascertain whether each sale made by the cartelist was
connected to the anti-competitive agreement, as argued by the applicants, would
require a disproportionate administrative effort from the acting competition
authority.
Pilkington is good news for the Commission’s cartel enforcement
policies. Taking into account also the sales made before the implementation of
the cartel may boost the ensuing competition fines, thereby strengthening their
deterrent effects. The reverse of the medal is, however, that infringers may
see their competition fines increased due to revenues generated before the
cartel was put in place to the detriment of legal certainty. Because the
decisive argument in Pilkington for
the extensive interpretation of the concept of sales was the wide scope of the
cartel, it may be thought that the Commission will follow in future the same
approach with regard to cartel having a similarly broad scope.
Second, Pilkington
should be also carefully read by competition infringers with non-euro accounts.
The risks of changes in exchange rates are inherent in the business environment
where firms operate and constitute a business risk to which they are exposed. With
regard to EU competition enforcement, such risks may arise when a firm is located
in a country outside the euro area and has non-euro accounts. In such a
scenario, the conversion of the competition fine from euro into the national currency
of the infringer, on the basis of the exchange rate selected by the Commission,
may result in an unexpected increase in the 10% cap of Article 23(2) of
Regulation 1/2003. What Pilkington said
was that currency risks were upward or downward risks for all businesses. Thus,
the principles of equal treatment and legal uncertainty were not breached because
the Commission chose to applied the average rate exchange observed during the
business year before the infringement decision.
The exchange rate applied by the Commission looks to
be more favourable for competition infringers from outside the euro-zone. As
the exchange rate embraced a relatively long period of time, it was more likely
to mitigate the negative repercussions that the changes in the euro/sterling exchange
rate might have on the competition fine. In conclusion, currency rate fluctuations
do not appear to be an effective defensive strategy for firms from outside the
euro zone trying to mitigate their competition liabilities. More suitable
strategies to deal with such currency risks are building reserves in euros, as
required by good accounting practices, or entering into hedging contracts
targeting the risks associated with the exchange rate between euro and national
currencies.
Third, Pilkington
dealt with the issue whether the cartelists whose business model is more
centered on the cartelized markets were discriminated in comparison with the
more diversified infringers as to the proportion between the overall turnover
and the amounts of competition fines. Apparently, the CJEU acknowledged that the
former might be discriminated, though it added that the discrimination was of
no such magnitude to call for the amendment of the relevant setting fine rules.
This issue was addressed in a clearer way by the Opinion
of the AG Kokott. She correctly pointed out that a firm that obtained a large
share of profit from the cartelized products extracted a proportionally higher
profit from the cartel than the other participants. Logically, that might
result in the imposition of competition fines proportionally higher than those
levied on the cartelists whose activities embraced a wider range of markets. In
conclusion, less diversified firms should consider the regulatory risk of being
levied proportionally higher competition fines than competitors in case they
infringe competition in their core markets.
[1]
Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a)
of Regulation 1/2003 OJ [2006] C 210/2.
[2]
C-101/15 P, Judgment of 7 September 2016, Pilkington
Group and Others v European Commission, ECLI:EU:C:2016:631.
[3]
Commission decision of 12 November 2008, COMP/39.125, Car Glass.
[4]
T-72,09, Pilkington Group and Others v
European Commission, ECLI:EU:T:2014:1094.
[5]
Para. 22 of the judgment.
[6]
Point 64 of the judgment.
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