(by Andreas Stephan) The imposed on Grolsch for the price fixing of beer in Holland. In its decision, the European Commission had treated Koninklijke Grolsch NV and its subsidiary as a single economic entity and calculated fines accordingly. This is important. The maximum fine is capped at 10% of turnover and the parent company combines the sales of many subsidiaries. Taken at face value, the Court ruling could substantially reduce fines and so also their deterrence effect.

A total of €273m was imposed in 2007 for coordinated price hikes and customer allocation between competing beer manufactures. The Court annulled the fine because it found the Commission failed to make an adequate statement of reasons explaining why the parent and subsidiary should be treated as one undertaking. The case raises the question: should parent companies be liable for the anti-competitive conduct of their subsidiaries?

Background

It is settled case law that where a parent company owns 100% of a subsidiary which has committed an infringement of the competition rules, there is a rebuttable presumption that the parent company exercises decisive influence over the conduct of its subsidiary. (See Akzo Nobel NV v Commission Case T-112/05 [2007]). Parent and subsidiary firms are treated as a single undertaking for the purposes of Article 101, thus an agreement between them cannot fall within the cartel prohibition. Unless the presumption is rebutted by demonstrating that the subsidiary was autonomous in some way, the Commission can hold the parent company jointly and severally liable for payment of the fine imposed on the subsidiary. The decisive influence does not need to relate to the anti-competitive conduct. It simply refers to influence over the of the subsidiary. This treatment of parent and subsidiary has enormous implications for enforcement. The maximum penalty becomes 10% of the worldwide turnover of the parent firm and all its operations – not just of the subsidiary involved in the cartel. It also has implications for the number of jurisdictions in which the undertaking may face private actions for damages.

The present case

Koninklijke Grolsch NV appealed the decision and argued they should not be held responsible because it had been employees of its Dutch subsidiary who had attended the cartel meetings in question. It argued that the Commission’s decision should have been addressed to the subsidiary and should not have implicated the parent company. The General Court did not annul the fine because these arguments were taken to exculpate the parent firm from liability. It did so because the Commission failed to explain, in its decision, its reasons for attributing to Koninklijke Grolsch NV the conduct of its subsidiary. This meant that the parent firm was denied the opportunity to rebut the abovementioned presumption when appealing the decision to the General Court. In its decision, the court does recognise the well-established presumption. This suggests what was missing from the decision was a simple statement reading something along the lines of: “Koninklijke Grolsch NV is held jointly and severally liable for the conduct of it subsidiary because it holds 100% of the capital of that subsidiary and therefore exercises a decisive influence over it”. However, some within the Commission will be concerned that the Court is looking for a more detailed justification for why the parent firm should be held liable.

Should parent firms be held liable?

On the one hand, it might be desirable to attribute liability at the highest possible level within an organisation, to further deterrence. Fines imposed on parent firms, as well as subsidiaries, can go further in ensuring the organisation takes compliance training and auditing seriously. Consequently, the cartel fine might reduce the chances of recidivism everywhere in the organisation, not just within the subsidiary. On the other hand, firms like Shell (whose subsidiary was involved in the Road Bitumen Cartel in 2006) already appear to take competition law compliance very seriously. There will inevitably be limits to a parent company’s ability to keep an eye on all its subsidiaries, just as it is difficult for firms to monitor the activities of all their employees so as to ensure they are not talking to competitors. There is also a serious issue of proportionality. The fact that the 10% fine cap extends to the parent firm and all its operations creates a perverse effect: the more of an organisation’s operations involved in cartels, the more likely they will be to benefit from the 10% cap. A firm with a good compliance record but with one rogue subsidiary behaving anti-competitively, risks being punished more severely than a smaller firm fixing prices at an institutional level.

Despite these shortcomings, it is important that parent companies and subsidiaries continue to be held collectively responsible for anti-competitive conduct. Imposing fines on the whole organisation will increase their positive deterrent effect. Big firms might otherwise have an incentive to carve themselves up into multiple subsidiaries in order to reduce their exposure to antitrust fines and potentially reduce their probability of detection. In addition, the 10% cap is still only a maximum penalty which is engaged in only a very limited number of cases. Thus the penalty will generally be set to adequately reflect the infringement, despite the varying maximum fine according to the size of the whole conglomerate.