(by Andreas Stephan) A speech by the European Commissioner for Competition may signal a greater willingness to grant discounts in cartel fines on the grounds of financial constraints. Reluctance to fine firms out of business is understandable, but may weaken enforcement at a time when cartel infringements are more likely.

His speech accompanied the imposition of fines on firms involved in the bathroom fittings cartel. Three of these firms received a 50% discount on bankruptcy grounds, in addition to leniency discounts. Another two firms received a 25% bankruptcy discount plus leniency. The Commissioner stated:

…the Commission is aware that some companies, particularly in today’s economic climate, may be in financial difficulties. Those companies should not be made bankrupt because of the Commission’s fine. Where their financial difficulties are real, the Commission will take that into account and lower the fine. […] Unsurprisingly, given the crisis, those claims have increased in the last year.

In keeping with the Commission’s now characteristic lack of transparency, we do not know which firms received the discount: “You will understand that the companies would not like me to reveal their names”, the Commissioner added. Herein lies our main problem: there is no way to effectively scrutinise how the Commission calculates or grants such discounts. In particular, it is unclear whether a bankruptcy discount represents good competition policy or underlying political and social policy concerns. The Commission is a very political beast and is under an obligation to promote objectives contained in the Treaty for the Functioning of the European Union, beyond competition. In the Bathroom Fittings case, it stated “The Commission also looked at the social and economic context of each company”, hinting that we are no longer just concerned with competition here.

The reasons for not wanting to fine a cartelist out of business are convincing enough: increased unemployment, costs associated with liquidation and unused capital, more concentrated markets etc. However, bankruptcy is also a natural consequence of competition during a downturn. Less efficient firms may very well exit the market to redress excess supply. This is perfectly consistent with good competition policy as the industry will be left with fewer, but more efficient firms. If there are social policy concerns, then these should not interfere with cartel enforcement. Firms can be allowed to pay fines in relatively small instalments. Instead, the Commission grants seemingly arbitrary discounts (50%, 33%, 25% in previous cases) without any careful explanation of why the discounts are necessary or how the precise figures are calculated. This contrasts with the , where although favourable payment terms were accepted, there were no bankruptcy discounts and some of the firms became insolvent during and after the investigation.

It is at least encouraging that five other firms claimed financial difficulties, but were not granted bankruptcy discounts in the bathroom fittings case. Fines of €622 million on 17 undertakings are still substantial. For the first time, the Commission also identified the criteria used: “recent financial statements, provisional current year statements and future projections, several financial ratios that measure a company’s solidity, profitability, solvency and liquidity, and relations with banks and shareholders”.

As deterrence is paramount to cartel enforcement, the granting of bankruptcy discounts on the scale outlined above may be interpreted by firms as a weakening in enforcement. Studies already suggest that likely to be enjoyed by a cartel, so the Commission’s fight against such infringements has to be in part psychological, beyond simply trying to make sure that cartels are not worthwhile in monetary terms. Imprisonment has the potential to complement corporate fines, but we are still a long way from criminal offences on the national level complementing administrative enforcement by the Commission on the EU level.

The ‘kitchen sink’ approach to any good defence strategy means that the Commissioner’s speech will encourage every firm to argue the bankruptcy wildcard. Apart from the added administrative burden of conducting such an analysis in every case, it may not be that difficult for a firm to present its finances in such a way as to successfully argue financial difficulties – especially in the current economic climate.

The issue of bankruptcy discounts in cartel cases was discussed in my 2006 paper: ‘The Bankruptcy Wildcard in Cartel Cases’ Journal of Business Law (August 2006) pp.511-534