Fines, “small” companies and the 10% cap

Do the fining rules treat small companies badly?  This is an occasional criticism of the 2006 Guidelines on Fines.  Is it accurate? Let’s take an intentionally simplified example.1

Nine companies each have value of sales of 10m euros per year in a product which they cartelise. All are equally culpable (no aggravating or mitigating circumstances to take into account), save for the duration of their participation in the cartel – three had a short duration, three medium, and three long. The only other relevant difference between the companies is their total worldwide turnover; similarly three had a small turnover, three medium, three long.

This gives us nine different companies which we can group – for example – by their worldwide turnover, the duration of their participation, or their theoretical fine.

Let’s assume that the theoretical fine is based on their cartelised sales * duration * variable amount of 15%, plus the entry fee (15% of their cartelised sales). Each has the same liability and impact on the market for each year of the cartel; in terms of harm caused, only the duration of their involvement differs.

This spreadsheet sets out a possible fines calculation based on the 2006 Fines Notice, showing the potential fine before and after (where relevant) the 10% cap on each of these nine companies. It also adds a couple of additional columns looking at the potential gains that the cartelists may have made from the cartel, assuming a cartel uplift of 15%. 2

This table sets out the calculation (and may mess up the display of this post on smaller screens – apologies if it does):

Company Value of Sales3 Worldwide Turnover Duration Revenue from cartel uplift4 Fine pre-cap5 Fine pre-cap as % of cartel uplift Fine pre-cap as % of turnover Fine after cap Fine after cap as % of cartel uplift Fine after cap as % of turnover
A 10 1000 15 23 24 107% 2.4% 24 106.7% 2.4%
B 10 250 15 23 24 107% 9.6% 24 106.7% 9.6%
C 10 50 15 23 24 107% 48.0% 5 22.2% 10.0%
D 10 1000 7 11 12 114% 1.2% 12 114.3% 1.2%
E 10 250 7 11 12 114% 4.8% 12 114.3% 4.8%
F 10 50 7 11 12 114% 24.0% 5 47.6% 10.0%
G 10 1000 3 5 6 133% 0.6% 6 133.3% 0.6%
H 10 250 3 5 6 133% 2.4% 6 133.3% 2.4%
I 10 50 3 4.5 6 133% 12.0% 5 111.1% 10.0%
If you look at the spreadsheet or the table, you can see how the fine varies depending on the size of the company, the impact of the differing durations, the relationship between the fine and the total turnover of the companies, and the relationship between the fine and the potential cartel uplift.

If you want to change any of the parameters of the spreadsheet, you only have to change the numbers in red.  The rest will update automatically.  You can change the value of sales, worldwide turnover, duration, variable amount and cartel uplift, and see the impact it has on the fine, the cap and the potential gains from the cartel.

This table inevitably contains assumptions. The 10% cap must be obeyed; consistency across different cartels is ignored; the percentage for the variable amount and the entry fee is 15%; the assumed cartel uplift is 15%. All of these assumptions bar the 10% cap are open to debate (and as I said you can change them in the spreadsheet) but – though they are needed for a fines calculation – the precise number on each is not relevant to the overall point: the impact of the Fines Notice on companies with the same cartel participation, but of differing sizes.

So what does this table show?

Some types of companies are more likely to hit the 10% cap than others: those where the turnover in the cartelised product is a higher percentage of total worldwide sales.  It’s not the case, however, that this is inherently a small company issue.  It applies at whatever company size. However it is likely that in the real world, small companies will tend to be more “monoproduct” than large ones.  Large companies will tend to be more diversified, or have parent companies (the effect of which for the purpose of calculating worldwide turnover is the same as the sale of differing products within the same company).

Is this a bad thing?  Well if you look at the fine as a percentage of turnover, it does look as though monoproduct companies are fined more heavily than multiproduct ones. On the other hand, if you look at the absolute level of the fines – ie the amount of cash that companies would have to hand over in fines, then monoproduct companies do rather well.  The cap limits the amount of cash they have to pay. And again, this is not necessarily linked to the harm caused.

The cap does not limit the amount of harm they may have done.  It is inherent in the assumptions in the table that every group of three companies has the same cartelised turnover, the same duration and the same liability – they are all responsible for the same amount of harm.

The column estimating the revenue from the cartelised uplift that each company receives is a proxy for the harm resulting from their participation in the cartel. As the value of sales is the same for each company, and assuming a consistent cartel uplift, the uplift varies only according to the duration of the cartel. Here again we can see that monoproduct companies do rather well; only for short duration cartels does the fine outweigh the potential cartel profits.

So does the Commission’s fining policy unduly hit smaller companies? It depends in part what you mean by “unduly hit”. Yes, in the sense that the potential fine will likely be a higher percentage of their annual revenue; no, in the sense that the potential fine will likely be comparatively small in relation to their potential cartel profits.

Whether you think small companies are unduly hit by Commission fines will depend which of these you think is the more important. It also depends on the right balance – between taking into account the potential unlawfully acquired gains and the potential impact on the company – that needs to be reflected in a fine that ensures both punishment and deterrence.

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