Revisiting Parental Liability in EU Competition Revisiting parental liability...  Revisiting Parental

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    Revisiting Parental Liability in EU Competition Law

    Andriani Kalintiri*

    London School of Economics and Political Science

    Keywords: parental liability; competition law; single economic unit; decisive influence; failure to exercise

    vigilance; enterprise

    Abstract

    Why parent companies are held liable for the infringements committed by their subsidiaries under EU

    competition law? This article examines the jurisprudence of the EU Courts with a view to illuminating

    the rationale underpinning parental liability. Taking a closer look at the single economic

    unit/undertaking explanation endorsed by the Courts post-Akzo, it demonstrates that this doctrine

    lacks the exegetical power assigned to it, insofar as it is based on a fallacious reasoning. With this in

    mind, two alternative justifications for parental liability are then discussed: the failure to exercise

    vigilance theory and the enterprise rationale. As the article illustrates, both justifications have

    their advantages and limitations. Ultimately, the final choice lies with the EU Courts, but it is

    submitted that, all things considered, the failure to exercise vigilance argument offers a better or

    at least more realistic solution to the problem of developing a coherent explanation for parental

    liability in EU competition law.

    Introduction

    Why parent companies are held liable for infringements committed by their subsidiaries under EU

    competition law? Simple as this question might be, the answer remains elusive, if not controversial. In

    brief, the problem may be synopsised as follows. European Union (EU) competition law consists of

    two core rules in the Treaty on the Functioning of the European Union (TFEU):1 Article 101 TFEU,

    which forbids anticompetitive coordination; and Article 102 TFEU, which prohibits abuses of a

    dominant position in the market. Both provisions are addressed against undertakings. This term has

    been defined by the EU Courts as referring to an economic rather than a legal unit.

    Accordingly, an undertaking may consist of one or several legal persons as in the case of corporate

    groups, which are typically structured around parent companies and subsidiaries.

    Fines, however, may only be imposed on entities with legal personality. Indeed, as the EU Courts

    have explained,2 although () an undertaking () is not necessarily the same as a company having

    a legal personality, it is necessary for the purposes of applying and enforcing decisions to identify an

    entity possessing legal personality to be the addressee of the measure.3 Therefore, when the

    European Commission adopts a decision pursuant to the competition rules, it must identify the

    natural or legal person or persons who can be held responsible for the conduct of the relevant

    *Fellow, Law Department, London School of Economics and Political Science. 1 Consolidated Version of the Treaty on the Functioning of the European Union (TFEU) [2008] OJ C115/47. 2 References to the EU Courts should be understood as reference to the General Court of the European Union (General

    Court) and the Court of Justice of the European Union (ECJ). 3 Limburgse Vinyl Maatschappij and Others v Commission (T-305/94, T-306/94, T-307/94, T-313/94 to T-316/94, T-318/94,

    T-325/94, T-328/94, T-329/94 and T-335/94) ECLI:EU:T:1999:80, at [978].

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    undertaking and can be penalized for that conduct.4 Where an undertaking encompasses a group of

    companies and the unlawful practice has been committed by a subsidiary, one would be excused to

    think that any liability would burden the latter only. Nevertheless, over the past decade the EU Courts

    have favoured a different approach to the attribution of liability in these circumstances. According to

    now settled jurisprudence, where the parent company exercises decisive influence over the conduct of

    its subsidiary, the two entities constitute a single undertaking and may thus be held jointly and

    severally liable for the antitrust violation in question and the imposed fine. Such decisive influence is

    presumed to have been exercised in the case of wholly-owned subsidiaries, unless the parent company

    provides evidence that the subsidiary has decided independently upon its own conduct on the

    market.

    Unsurprisingly, corporate groups have not taken the rules on parental liability in stride. In cartel cases

    in particular, parent companies have fiercely fought back by persistently challenging Commission

    decisions before the EU Courts. In a nutshell, most complaints revolve around three arguments: first,

    that the rules governing parental liability are incompatible with the principle that responsibility for a

    competition violation is personal; second, that they pierce the corporate veil, thereby violating the

    principle of limited liability of company shareholders; and third, that they contravene the principle of

    effective judicial protection, insofar as the presumption of decisive influence with respect to wholly-

    owned subsidiaries is practically impossible to rebut. These criticisms, however, have been met with

    little sympathy by European judges, who have time and again dismissed them as unfounded. Indeed,

    the standard judicial response to all objections against parental liability over the past ten years has

    been twofold: first, that parent companies are held responsible for the antitrust violations of their

    subsidiaries because they form a single economic unit with them and thus the same undertaking; and

    second, that, albeit difficult to reverse, the presumption of decisive influence in the case of wholly-

    owned subsidiaries remains within acceptable limits and hence fair.

    Nevertheless, parental liability is not as straightforward as the EU Courts claim; on the contrary, it

    raises difficult questions of policy and law, which have not been adequately addressed. The problem

    stems from the fact that, for all its apparent consistency, the case-law does not allow one to deduce a

    coherent theory for ascribing to parent companies responsibility for the antitrust transgressions of

    their subsidiaries. Indeed, despite the wealth of jurisprudence on the matter, the reason why parent

    companies are held liable remains unclear. Even worse, the EU Courts reluctance to engage with the

    criticisms raised by parent companies and their dry adherence to earlier judicial statements have had

    an unfortunate straightjacket effect, resulting in the creation of a convoluted web of precedents from

    which it is nearly impossible to escape. Parental liability, however, is not an issue to take lightly. On a

    doctrinal level, the question whether parent companies should be held responsible for the conduct of

    their subsidiaries has proved extremely contentious. On the one hand, the structuring of corporate

    groups around parent companies and subsidiaries is an intrinsic feature of the modern economy. On

    the other hand, legal fictions may sometimes result in objectionable outcomes, insofar as they may

    enable corporate groups to shield themselves from liability by externalising the risks of their

    activities.5 These issues become even more complicated in the context of competition enforcement.

    Competition violations are akin to regulatory offences and have criminal connotations due to the

    4 Areva and Others v Commission (T-117/07 and T-121/07) ECLI:EU:T:2011:69, at [64]; Uralita v Commission (T-349/08)

    ECLI:EU:T:2011:622, at [36]. 5 W.Douglas and C.Shanks, Insulation from Liability through Subsidiary Corporations (1929) 39 Yale Law Journal 193.

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    severe financial penalties that the Commission may inflict on undertakings.6 At the same time,

    antitrust infringements may cause harm to a large number of stakeholders, thereby giving rise to

    actions for damages.

    Against this backdrop, the justification for parental liability in EU competition enforcement is a

    question one may no longer ignore. In fact, the issue has become more pressing since the coming into

    force of the Damages Actions Directive which is expected to increase the levels of private

    enforcement,7 and in light of the Commissions recent proposal for the adoption of a Directive aiming

    at empowering national competition authorities, among others, by requiring Member States to ensure

    that the notion of undertaking is applied for the purpose of imposing fines on parent companies.8

    With this in mind, the aim of the present article is to examine the rationale behind the attribution of

    liability to parent companies for the antitrust transgressions of their subsidiaries based on the

    jurisprudence of the EU Courts. As the analysis will demonstrate, the current foundation of parental

    liability i.e. the single undertaking argument lacks the exegetical power assigned to it by the EU

    Courts, insofar as it is based on a fallacious reasoning, whereas its application suffers from serious

    shortcomings. Consequently, it is imperative to consider alternative explanations for holding parent

    companies accountable for the competition infringements perpetrated by their subsidiaries. In

    investigating these issues, the article is structured as follows. First, it outlines the evolution of the

    rules governing parental liability and identifies two distinct phases in the judicial approac