European Court of Justice: Children are liable for their parents!

The Spanish manufacturer of containers, Sumal, S.L. (Sumal), has filed a claim for follow-on damages against Mercedes Benz Trucks España, S.L. (MBTE), a Spanish subsidiary of the German Daimler AG. The claim was a follow-on litigation based on the 2016 decision of the European Commission against members of the so called truck cartel, in which the Commission had issued a fine of EUR 2.93 billion against Daimler AG and other truck manufacturers. The Spanish court of first instance dismissed Sumal’s claim and held that MBTE could not be regarded as liable for follow-on damages resulting from an infringement committed by its parent company, MBTE not being addressee of the Commission decision.

Due to diverging judgments by Spanish courts as to this question, the court of appeal (Audiencia Provincial de Barcelona) requested a preliminary ruling from the ECJ regarding the question whether subsidiary companies could be held liable for cartel damages resulting from infringements for which the European Commission has fined their parent companies by which they were fully owned (Request for a preliminary ruling from the Audiencia Provincial de Barcelona dated 3 December 2019, Case C-882/19 – Sumal, S.L./Mercedes Benz Trucks España, S.L., available here).

In his opinion of 15 April 2021, Advocate General Giovanni Pitruzzella argued that the subsidiary company should be liable for damages caused by infringements of its parent company (top down liability) if the subsidiary's business was ‘in some way necessary’ to give effect to the anticompetitive conduct (e.g. because the subsidiary sold the goods that were subject of the cartel). The subsidiary must therefore operate in the same field as that in which the parent company has engaged in anti-competitive conduct and must have been able, through its conduct on the market, to give effect to the infringement.

The starting point for his reasoning is the concept of economic unit, which is constantly applied by the ECJ in the context of administrative fines and has led to judgments stating that a parent company having decisive influence over a subsidiary is liable for infringements of this subsidiary (bottom up liability in the context of administrative sanctions; check out our blog entry for the analysis of the Advocate General’s opinion here).

In its judgment of 6 October 2021, the Grand Chamber of the ECJ agreed with the Advocate General’s opinion. The ECJ held that, in case of an infringement against Article 101 TFEU, follow-on claimants can direct their cartel damage claims not only against the parent company on which the fine was imposed but also against the subsidiary that was not addressee of the administrative decision penalizing the infringement of EU competition rules. It is sufficient that parent and subsidiary form an economic unit. An economic unit consists of a unitary organization of personal, tangible and intangible elements, which pursues a specific economic aim on a long-term basis. In this regard a specific link between the economic activity of the subsidiary and the subject matter of the infringement against Article 101 TFEU for which the parent company was held to be responsible is necessary. Otherwise, as underlined by the ECJ, a subsidiary could be held liable for infringements committed in the context of economic activities entirely unconnected to its own activity and in which it was in no way involved, even indirectly.  

In this context, the ECJ pointed out the requirements of the right to an effective defense and to a fair trial, that must be observed in respect of the defendant to an action for follow-on damages. Therefore, before the national court dealing with the claim, that subsidiary company must dispose of all the means necessary for the effective exercise of its rights of defense, in particular in order to be able to dispute that it belongs to the same economic unit as its parent company. In principle, the subsidiary company must also be able to refute its liability for the harm alleged, inter alia by relying on any ground that it could have raised if it had participated in the proceedings brought by the Commission against its parent company. However, if the infringement is established by a decision of the Commission addressed to the parent company finding that there was conduct which infringed Article 101 TFEU, the subsidiary cannot challenge the existence of the infringement found by the Commission.

Furthermore, the ECJ held that Article 101 TFEU precludes a national law to limit imputing liability for conduct of a company to another company only in circumstances where the second company controlled the first. In other terms: national law must guarantee that the subsidiary can be held liable for its parent company’s conduct.

The ECJ justifies this landmark decision – as already in the Skanska case (ECJ, judgment dated 14 March 2019, Case C-724/17 – Vantaan kaupunki/Skanska Industrial Solutions Oy and others, available here) – in particular with the concept of private enforcement of EU competition rules. In fact, just as is the case for the implementation of the EU competition rules by public authorities (public enforcement), actions for damages for infringement of those rules (private enforcement) are an integral part of the system for enforcement of those rules, which are intended to punish anticompetitive behavior on the part of undertakings and to deter them from engaging in such conduct. According to the ECJ, it follows that the concept of ‘undertaking’ within the meaning of Article 101 TFEU, which constitutes an autonomous concept of EU law, cannot have a different scope with regard to actions for damages for infringement of EU competition rules as compared to the imposition of fines. Regarding the imposition of fines, it is established case law of the ECJ that the term ‘undertaking’ in the sense of Article 101 TFEU means any entity engaged in an economic activity, irrespective of the legal status of that entity and the way in which it is financed, and thus defines an economic unit even if in law that economic unit consists of several legal persons. This often results in the application of joint and several liability amongst the entities of which the economic unit is made up at the time that the infringement was committed. However, as the ECJ points out, this is not the result of the attribution of an infringement committed by a different entity; it is simply the economic unit as a whole that has committed the infringement via its entities.

To sum up, the ECJ has ruled that, in case of an established infringement of the parent company, anyone who has suffered a damage caused by an anticompetitive conduct can invoke the liability of a subsidiary company in addition to that of the parent company. However, the liability of that subsidiary cannot be invoked unless the victim proves that the subsidiary, together with its parent company, constituted an economic unit having regard to

• first, the economic, organizational and legal links between the two companies and,
• second, the existence of a specific link between the economic activity of the subsidiary and the subject matter of the infringement for which the parent company was held responsible.

Considering the binding effect of findings of an infringement of Article 101 (1) TFEU by the European Commission (or national authorities and courts, cf. Article 16 (1) of Regulation No 1/2003 and section 33b of the German Act against Restraints of Competition (GWB)), such proof should not be too difficult in the case of subsidiaries that were involved in the distribution of the cartelized product on the same (cartelized) product market as the parent company.

With this judgment, the ECJ introduces a new facet of corporate liability, which – in addition to the existing case law on subsidiarity’s liability in the context of administrative fines and, due to the Skanska case, of civil damages – now also establishes top down liability in the context of follow-on litigation. Thus, the ECJ ‘pierces’ the corporate veil once again, contrary to the basic concept in many national legal systems, which only recognize joint liability between different companies (even within the same group) under very strict conditions (so-called separation or legal entity principle).

The joint and several liability of a parent company for the infringement by its subsidiary has long been recognized at EU level regarding the imposition of fines (ECJ, judgment of September 18, 2009, Case C-97/08 – Akzo Nobel). The German legislator has also followed suit and introduced corresponding rules on parent liability as part of the 9^th GWB amendment in 2017. In the Skanska case, the ECJ had applied the case law on economic units to competition law damages, but explicitly limited its reasoning to the case of legal succession at issue there (the per se liable company had been liquidated and the new owner of the same company could not have been held liable under national law). However, since the ECJ's reasoning was mainly based on the fact that the economic entity was liable as a whole, some of the competition law literature already saw the Skanska judgment as evidence that the civil liability of the subsidiary always extended to the parent company and vice versa.

However, according to the principles of the Akzo Nobel ruling, an extension of liability requires that the parent company can exercise a determining influence on the subsidiary. In the reverse, however, such an influence does not exist. Yet, according to the current decision of the ECJ, such influence is not necessary: The mere facts that (i) the subsidiary belongs to the same economic unit and (ii) there is a specific link between the economic activity of the subsidiary and the established infringement of the parent company justify the extension of liability.

The judgment is further evidence that private enforcement is an integral part of the implementation of EU competition law. The ECJ did not explicitly state whether it would also like to make sister companies liable for each other on this basis. Nevertheless, the court’s considerations suggest that such an extension of liability is also possible under the above conditions.

It has not yet been established how to assess constellations in which the legitimate ownership and investment interests of third parties are affected. If, for instance, the parent company and subsidiary belong to the same economic unit, but the parent company does not hold all shares in the subsidiary, the extension of liability decided by the ECJ also affects the interests of minority shareholders. If the subsidiary were to be used as the subject of liability in such a case, the minority shareholders of the subsidiary would be exposed to considerable financial risks for actions of which the subsidiary itself may not have been aware and which, moreover, are completely beyond the influence of these shareholders. It cannot be inferred from the judgment whether the ECJ has given any thought to this. From an economic point of view, however, this is of great importance and in the future, minority shareholders will have to deal with the question of how they can protect the value of their shareholding.

In any case, the decision could also lead to further consequences for all economic operators. One example is the acquisition or divestiture of companies (M&A transactions). In view of the Luxembourg ruling, liability scenarios will have to be considered in company purchase agreements in the future: If a parent company involved in a cartel sells its subsidiary (which is unaware of the infringement), the acquisition process entails risks for the buyer and new owner which can no longer be mitigated solely by a thorough legal evaluation of only the target company (due diligence). Therefore, appropriate indemnification clauses and guarantees are likely to become indispensable, at least in situations in which an extension of liability to the acquired company in accordance with the ECJ criteria is conceivable. Against this background, the structuring of the transaction (in particular internal compensation arrangements, guarantees, indemnities, etc.) will become more important for acquirers.

In any case, cartelists will observe with some concern whether victims will seek out specific advantageous jurisdictions to pursue their claims (so-called forum shopping) due to the recognition of top down liability by the ECJ. The question of applicable law will also be in focus, as – despite a certain standardization through the implementation of Directive 2014/104/EU – differences remain between the legal concepts of follow-on damages in various EU Member States (e.g. legal presumptions of a minimum cartel overcharge in Hungary, Latvia and Rumania). The courts will also have to answer a number of still unresolved questions (e.g. on statutes of limitation, which in some cases differ considerably from one EU Member State to another).

The extension of liability created by the ECJ judgment is likely to further reduce the willingness of companies to disclose infringements to the authorities by asking for leniency. Competition authorities such as the German Federal Cartel Office are increasingly concerned about this development and are openly considering the necessity to exempt leniency applicants from civil liability. The discussion about the right balance between public and private enforcement is likely to gain further momentum as a result of the ECJ decision. Positively twisted: all these imponderables could at any rate lead to antitrust compliance being taken even more seriously than before by companies, which would certainly be welcome.