The European Commission levies high fines on companies that break the competition rules. Some of those companies argue that the fines are now too high.

So what is too high?

If a company breaks the competition rule prohibitions on anti-competitive agreements or the abuse of monopoly power, then the Council has given the European Commission the power to fine that company up to 10% of its annual global turnover with the fine based on the gravity and duration of the illegal behaviour.

This provision is neither new nor unique: it was first set out in a Council Regulation in 1962, and most competition laws have similar provisions.

What is new is that over the last fifteen years, the absolute level of fines has risen markedly – though for many years they were at such a low level that companies would not have taken them seriously.

What is unique is that the absolute level of fines levied by the Commission is usually higher than fines levied by national competition authorities – though that is likely because the Commission tends to deal with significantly larger, often, global – cases.

Nevertheless, fines are now at the point where they themselves make headlines and companies complain that they are far too high.

Are they? This question is inseparable from the question of what the fines are intended to achieve.

The main aim of any enforcement authority is to prevent the illegal behaviour (which is why the Commission puts a lot of effort into explaining the rules and providing guidance). Fines, in addition to being a punishment, also contribute to prevention by being a deterrent. Fines therefore exist both to punish and to deter: to punish breaches of the competition rules and to deter companies from breaking the rules in the first place.

Prison Bars

By: -JvL-

If companies don’t get caught, then breaking the competition rules is lucrative. Why else would the companies risk high fines and individuals – in some countries – risk jail time?

Accurate estimates are very difficult, but there are mainstream estimates of cartels overcharging by 10% to 30%. That means that prices for customers of those cartels may have been increased by 25% for each and every product sold by the members of the cartel. What if the cartel lasted for five years? Or ten? Many have done.

Take a company that had a turnover of 100 million euros per year in the cartelised product, and was in a cartel for ten years. If the cartel maintained a 25% overcharge then, simplifying slightly, the company would have had a turnover of 80 million euros without the cartel, and the overcharge would be in the order of 20 million euros per year for ten years: 200 million euros in total.

Not all cartels are as profitable as this. Some cartels are formed not in thriving industries, but in declining ones, as companies struggle to maintain margins in an ever more difficult economic environment. Even in these cases there are still benefits to the companies – they maintain margins, and possibly even maintain their existence when otherwise both would have been squeezed.

Nevertheless, as fining policy has to deter companies from engaging in cartels, it has to take account of the fact that cartels can be highly profitable, and also of the fact that not all cartels are detected.

In addition, for the fine to punish the companies involved appropriately, the fine should generally be proportional to the breach – so a cartel that affected 100 million euros worth of products for ten years should be punished more heavily than a cartel that affected the same value of products for just one year. Similarly a company within a cartel that had a turnover of 100 million euros in the cartelised product should be punished more heavily than a company that had a turnover of only 10 million euros.

Usually there are two main factors that account for most of the fine – the Commission takes a percentage of the European turnover of the company in the products covered by the cartel – typically around 15%-20% – and multiplies that by the number of years the company was involved in the cartel.

So if a company had a turnover in the cartel of 100 million euros and was involved in a cartel for ten years, the fine would be likely to be in the order of 150 million euros (15% of 100 million multiplied by 10).

There are then various factors that can increase or decrease the fine. This gets complex very quickly.

So if a company with a turnover of 100 million euros were an SME, and the 10 million euros company was a small subsidiary of a major multinational, should that make a difference to the fine?

  • What if the SME were a repeat offender and the multinational weren’t?
  • What if the SME had co-operated with the Commission’s investigation but the multi-national had destroyed evidence and obstructed the Commission at every turn?
  • What if one of the companies is in financial difficulty and the fine could send it into bankruptcy?

The list of potential complexities goes on.

The Commission’s fining policy has to be sufficiently flexible to cope with these different scenarios.

And all of this of course is subject to the overall cap that the fine must be no more than 10% of the company’s global turnover. So if the company with 100 million euros of turnover had no other turnover (it was an individual company, not part of a larger group, and produced a single product that was cartelised), then the fine would actually be capped at 10 million euros, no matter how long it had participated in the cartel. Given that a ten year cartel may have led to an overcharge of 200 million euros, this would fairly likely be too low to be a meaningful deterrent.

This situation is relatively rare however. More commonly, the company produces a number of other products, so its turnover is rather higher and / or the company is a subsidiary controlled by a larger parent, and the 10% cap is based on the total turnover of the group.

This last point on the parent company being liable for the sins of the subsidiary is controversial. The parent company is liable if it can be shown to control its subsidiary, but it does not have to have been directly involved in the cartel activity itself. Some argue that this goes too far and liability should depend on actual complicity.

That seems rather narrow. With control comes responsibility.

Liability ensures that the parent company has the incentive to minimise the risk of being involved in a cartel in any of the group’s activities, by rolling out or reinforcing appropriate compliance efforts at group level, which then also have wider industry benefits in preventing companies to collude.

More prosaically, with control also comes the revenue stream from the unlawful activity. If the parent company has benefitted from the cartel overcharge, it seems right that they should be punished for the cartel as well.

Yet more prosaically, changing the rules on parental liability and limiting fines to 10% of the turnover of the company actually implicated in the cartel would lead to far more cases where the 10% cap was reached; and far more cases where the fine was too low to be a meaningful deterrent.

[Note: this article was originally published in the online magazine ESharp in 2011.  The publication date of this blog post reflects the date of original publication.]