A riskier environment

The European Commission is getting increasingly tough on companies that flout its competition laws


It has been a good few months for Neelie Kroes, the European Commissioner responsible for competition law. Her efforts to show companies that Europe is serious about busting cartels and cracking down on those that abuse their dominant market positions shows signs of paying off.

Kroes is intent on opening Europe’s energy markets to more competition and has been building up to a confrontation with the continent’s leading utilities players. But when the showdown came at the end of February, one of them, a leading German utility E.ON, spectacularly and unexpectedly caved in. The company agreed to sell part of its power grid, and in doing so demolished the argument of certain European Union member states that are resisting reform in the hope that they can still allow national “champions” to dominate their home markets.

Kroes has been investigating energy companies like E.ON for suspected abuse of their dominant position in the market. E.ON’s offer to sell its power grid was made in an effort to settle two antitrust investigations – and was immediately praised by the Commission. “E.ON’s announcement is definitely very much welcome,” said Andris Piebalgs, the EU’s energy commissioner and one of the leading proponents of breaking up the energy giants. “It definitely makes a huge impact on the debate.”

The company’s willingness to appease the Commission underlines the message from legal experts that Europe is becoming a more risky place for companies that flout its competition laws. The Commission is taking a more aggressive attitude to errant companies and its member nations are playing hardball, too – taking tougher action on their own, and working with each other to share intelligence across borders.

The crackdown doesn’t relate to any significant changes to European law, according to legal experts, but stems from a renewed political zeal to ensure fair competition, and a shift in tactics to frighten misbehaving companies. US businesses, in particular, should be aware that the likelihood of an investigation is higher, and the consequences of being found in breach are more severe, they say.

The scale of the Commission’s crackdown is clear from the rapid increase in the total fines it has imposed on companies forming illegal cartels. These have rocketed upwards from €400m in 2000 to €3.3bn in 2007. The total could exceed €5bn this year, predicts Mark Powell, partner in the competition law practice at lawyers White & Case. Enforcement action is continuing to intensify, he says, and guidance that allows the Commission to calculate much bigger fines will start to kick-in this year.

The Commission is also becoming more aggressive with its investigatory tactics. Earlier this year it launched high-profile dawn raids against some of Europe’s leading pharmaceutical companies, including GSK, Johnson & Johnson and AstraZeneca. Normally it reserves such heavy-handed tactics for cases where it suspects companies are breaking the law, but these raids were “just the starting point of a general sector inquiry.” The Commission is concerned that European pharmaceutical companies are not developing new products fast enough. “They really are using their teeth and using dawn raids in novel scenarios,” says Rebecca Holmes-Siedle, senior associate in competition law at law firm Stevens & Bolton.

Procedural breaches are being severely punished, too. In January, the Commission fined E.ON €38m for its behaviour following a raid on its premises. Investigators used a plastic seal to close a roomful of sensitive documents so E.ON employees couldn’t tamper with them overnight; when they came back the next day the seal had been broken. Competition Commissioner Kroes said the heavy fine “sends a clear message to all companies that it does not pay off to obstruct the Commission’s investigations.”

The Commission has also showed how tough it is willing to be on companies that fail to comply with its decisions. In February it hit software company Microsoft with a record €899m fine for non-compliance. The fine relates to the company’s failure to meet its obligations under a 2004 Commission ruling that required it to make information about its products available to other software companies.

The non-compliance fines imposed on the company now total nearly two-and-a-half times the penalty levied for its original offence. In its 2004 ruling, the Commission fined Microsoft €497m for abusing its powerful market position. The Commission added a further €280.5m fine in July 2006, claiming the company had not complied with its ruling – the first time it had ever had to fine a company for non-compliance.

Commenting on the latest penalty ruling, Kroes said it reflected “a clear disregard by Microsoft of its legal obligations.” She added that the record fine was “a reasonable response to a series of quite unreasonable actions.”

The Commission’s original ruling found that Microsoft was stifling innovation by charging prohibitive royalty rates for information that other companies needed to ensure their products worked on Microsoft’s Windows operating system. After that ruling, Microsoft offered to charge a royalty for the information; it has lately promised to provide it for a flat fee.

Microsoft recently published a statement promising to make interoperability information more available in future and Kroes said it appears as though the company has now come into compliance with its 2004 decision. However, the Commission is continuing with two other anti-trust investigations into the company’s practices, which it launched in January, and one of these concerns the same issue of interoperability. Kroes said she had noted the Microsoft statement, but added: “a press release does not necessarily equal a change in a business practice.”

More widely, she said, the non-compliance fines imposed on Microsoft were a lesson to companies contemplating similar illegal action. “Talk is cheap; flouting the rules is expensive,” she said. “We don’t want talk and promises – we want compliance.”

Lawyers say this tougher line has been building up since at least 2005, when Kroes took office. The notable recent shift is the focus on cartel activity. “That’s happening in the European Commission, and it’s also happening in the national competition authorities,” says Powell. “They are recognising that if they want to achieve results for consumers, it is through cartel policy that they are going to do it.”

Last year the Commission secured judgements against eight cartels, which involved 45 companies in total – that compares to just five cartels busted in 2003. The largest cartel case last year, which was also its biggest ever, involved a stitch-up of the market to maintain elevators and escalators. That concluded with fines totalling €992m, half of which fell on one company, ThyssenKrupp – another record. However, Kroes said in a recent speech that there was still a huge “enforcement deficit” in European anti-cartel law: “The wrongdoers are getting away with far too much and they owe their victims billions of euros.”

Getting tougher on enforcement is one way that Kroes hopes to bridge that deficit, but there are other initiatives underway, too. A policy White Paper due before the summer will set out plans to make it easier for people who feel they have suffered at the hands of a cartel to join together in class actions, which are very rare in Europe. The paper will also float the idea of enabling courts to award double-damages plus interest against what Kroes calls “hard core” cartels.

The Commission has also strengthened a leniency programme that grants complete immunity to companies that blow the whistle on cartel activity. “This has really worked as a carrot,” says Holmes-Siedle. “Whereas before they had to sniff out and detect cartels, which is difficult because they are by their nature secret, companies are applying for leniency and shopping everyone else,” she says. Powell notes that as the size of fine imposed continues to increase, the option of blowing the whistle via the leniency programme becomes even more attractive.

The enforcement environment is becoming more hostile at member-state level, too. In the United Kingdom, for example, the Office of Fair Trading, a government agency responsible for competition, has received a big boost to its resources; and new laws have made involvement in cartels a criminal act – the first prosecution will reach court this year. In Belgium, the government has changed the rules about what size of merger the competition authority has to scrutinise so that it can divert more resources to cartel-busting.

Member states are also doing more to co-operate with each other, through informal networks and newly created official channels. Regulations took effect in 2004, for example, that encourage national competition authorities to work with the Commission. “What is true across the whole of the European Union is that resources are being diverted to focus on this and the sanctions are increasing,” says Powell. “There is a more regular exchange of best practice between the authorities, they are learning from each other.”

In March, for example, Commission investigators carried out “unannounced inspections” – Brussels-speak for raids – at the premises of a number of international airline passenger carriers: its officials were accompanied by their counterparts from the national competition authorities involved. Lufthansa, the German flag carrier, said it was one of the companies raided.

The investigation relates to suspected anti-competitive behaviour in providing long-haul flights to Japan. Lufthansa, which in December was granted conditional immunity over its alleged participation in a freight transport cartel, said that investigators had visited the carrier’s Frankfurt offices in connection with allegations of price fixing. “The commission has information that passenger aviation companies, including Lufthansa in Europe and in Japan, may have taken part in anti-competitive price-fixing and collusive behaviour in traffic between the EU and Japan,” it said in a statement.

While Lufthansa might be the most recent company to find itself in the Commission’s firing line, it certainly won’t be the last. Europe is now a much riskier place for companies that flout its competition laws: Ms Kroes means business.