June 28, 2006
"Don’t break the anti-trust rules; if you do, stop it as quickly as possible, and once you’ve stopped, don’t do it again." With these words, Neelie Kroes, the European Commissioner for Competition, has announced new Guidelines on the setting of fines for infringements of the EU antitrust rules, relating to restrictions of competition and abuse of a dominant position.
The new Guidelines replace those adopted by the Commission in 1998 and will come into force as soon as published in all official EU languages. This is likely to take approximately two months.
Commission fines remain subject to a limit of 10% of the firm’s overall turnover in the preceding business year.
The 1998 Guidelines
Although the application of the old Guidelines had repeatedly been upheld by the European Court of Justice and the European Court of First Instance, the policy on which they were based was widely criticised as being unpredictable and often unfair.
For reasons which have never been made entirely clear, in 1998 the Commission suddenly abandoned its policy of setting fines by reference to a given percentage of a firm’s turnover on the market in which the infringement took place.
Instead, it adopted Guidelines which adopted a policy of classifying an infringement as being "minor", "serious" or "very serious". Indications as to the likely fine were given on the basis of this assessment, subject to adjustments to take into account the duration of the infringement as well as any mitigating or aggravating elements.
The fundamental flaw in this approach was that no account was taken of either the firm’s ability to harm competition or its ability to pay. Small firms, often from small Member States, found themselves potentially liable to fines similar to those imposed on large firms.
This was patently unfair, particularly in cartel cases involving very different-sized defendants. The Commission tried to mitigate the worst effects of the 1998 Guidelines by adjusting the fines through the placing of defendants in different categories according to their size. However, the number of categories was in practice limited to four, even if the difference in size was many times greater than four-fold.
The 2006 Guidelines
The new Guidelines, in the words of the Commission, "refine" (some might say abandon) this approach by reverting to the pre-1998 practice of setting fines on the basis of turnover.
In practice, this means that fines will be set at up to 30% of the previous year’s sales in the affected sector for each company participating in the infringement. This amount will be multiplied by the number of years of participation in the infringement. The sales taken into account will, in principle, be limited to the EEA, although there will be an adjustment mechanism where the markets are wider in scope than the EEA. (This is no doubt intended to ensure that EU firms will not be disproportionately punished.)
In addition, the Guidelines introduce a new possibility for the Commission to add to the basic fine a sum equal to 15% to 25% of the yearly relevant sales as an "entry fee" punishment. This is intended to act as an additional deterrent by raising the cost of even short-lived infringements.
The amount of the fine thus calculated will then be adjusted to take into account any mitigating or aggravating elements, but in any event cannot exceed 10% of the firm’s total turnover in the preceding business year.
Another new element is the widening of the scope of the notion of "recidivist" behaviour to include infringements which have been sanctioned by the national competition authorities of the EU Member States. The potential increase in fine for recidivist behaviour has been increased from 50% to 100%, again subject to the 10% limit.
The Commission also reserves the right to increase the level of fines where it believes that fines calculated on the basis of a percentage of sales in a small market would not have a sufficiently deterrent effect on a firm which has very high sales on other markets.
The new Guidelines are a considerable improvement both on the 1998 Guidelines and on the pre-1998 situation. They add clarity and will reduce the number of cases in which small firms are excessively penalised.
They also give the Commission ample tools to increase the level of fines on large firms. The Commission can be expected to make full use of the greater possibilities to impose high fines, particularly in cartel cases but possibly also in other cases where the Commission considers the defendant to be super-dominant or to have behaved in a particularly egregious manner.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Peter Alexiadis (+32 2 554 7200; [email protected]) or David Wood (+32 2 554 7210; [email protected]) in the firm’s Brussels office.
© 2006 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.