Private enforcement strikes again: liability of subsidiaries and sister companies

Guest blogger Michiel Verhulst (KU Leuven) on the Sumal-case

Subsidiary companies, and presumably sister companies as well, can be held liable to pay damages for the EU competition law infringements committed by their parent companies. In its judgement of 6 October 2021, the Grand Chamber of the European Court of Justice shed light on the EU autonomous concept of ‘undertaking’. The undertaking as a whole, meeting the characteristics of an economic unit, is to be considered personally liable for the actions of its different components. This automatically entails the joint and several liability among the legal and/or other entities that make up the economic unit at the time of the infringement.

More than two and a half years have passed since a previous blogpost explained how the judgement of the European Court of Justice of 14 March 2019 applied the autonomous EU concept of ‘undertaking’ to the private enforcement of EU competition law. As a result of this judgement, both the principles of parental liability and economic continuity became applicable when claiming damages for an infringement of the EU competition rules. The economic reality thus caught up with the legal matrix.

As we all know, many a thing has changed in the past two years. Even the economic reality felt surreal at times (off the top of my head: Brexit and some kind of virus). One thing, however, remains certain in this world (besides taxes): the private enforcement of EU competition law is the gift that keeps on giving.

Trucks cartel: infringement by the parent company

With the resurrection of the Matrix still in the pipeline, the ECJ already struck again. This time, it wasn’t the public enforcement that infiltrated the private enforcement, but rather the other way around. Indeed, the ECJ was asked a question that had not yet been resolved in the public sphere: can a subsidiary company be held liable for an EU competition law infringement committed by the parent company?

The facts of the case were as follows. Sumal S.L., a Spanish logistics company, acquired two trucks from Mercedes Benz Trucks España (hereinafter: MBTE) in 1997-1999. MBTE is a subsidiary company of Daimler AG, that took part in the so-called trucks cartel. On 19 July 2016, the European Commission fined several European truck producers for various reasons, one being their collusion on gross price increases for trucks in the European Economic Area between 1997-2011, which violated article 101 TFEU. Following this decision, Sumal decided to bring an action for damages against MBTE before the Barcelona Commercial Court, claiming to have paid a higher price for the acquired trucks due to the cartel in which Daimler took part. MBTE, however, argued that it could not be held responsible for the infringement committed by Daimler, as they are separate legal persons.

The Commercial Court of Barcelona agreed with MBTE and, by judgement of 23 January 2019, rejected the claim brought by Sumal. As expected, Sumal appealed against this judgement before the Provincial Court of Barcelona, which ordered a stay of proceedings and asked the Court of Justice whether a subsidiary company can be held liable for the article 101 TFEU-infringement committed by the parent company.

Liability of undertaking

The question by the Barcelonan Provincial Court basically boils down to the understanding of the autonomous concept of ‘undertaking’. In the aforementioned judgement of 14 March 2019, the ECJ had already decided that this concept cannot have a different scope when used for the imposition of fines or for the awarding of damages. Furthermore, it was clear from its previous case law that EU competition law focuses on the existence of unity of conduct on the market, piercing the corporate veil if necessary. An undertaking thuscovers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed” and “must be understood as designating an economic unit even if in law that economic unit consists of several persons, natural or legal”.

This means that, when one entity belonging to an economic unit commits an infringement of article 101 TFEU, the undertaking, constituted by that economic unity, is considered to have infringed that provision. It is the undertaking, possibly consisting of different legal and/or other entities, that is to be held liable in accordance with the principle of personal responsibility. As discussed in a previous blogpost on this blog, one could use the following metaphor to clarify this reasoning: a natural person being punished for punching someone in the face cannot defend himself by arguing that only his arm is at fault. Analogously, an undertaking cannot escape its liability by arguing that it was only one of its entities which violated the EU competition rules.

Thus, economic unities must be prepared: neither their legal structure nor their voluntary winding-up will prevent them from being fined or being held responsible to pay damages when one of them violates the EU competition rules. One for all, and all for one.

Economic unity as a dynamic, functional concept

The main question then becomes: what exactly is an ‘economic unit’? Interestingly, the answer differs depending on the liability invoked. If one wants to hold the successor company liable, the criteria developed in the related case law must be applied, e.g. when the entity which committed the infringement has ceased to exist because it has been taken over by the successor company, which took over its assets and liabilities. In that case both companies can be considered economically identical.

Obviously, that reasoning cannot be applied when determining the liability of a parent, subsidiary or sister company. Regarding parent company liability (‘upward liability’), previous case law clarified that the parent company and subsidiary can be considered an economic unity if the subsidiary “does not determine independently its own conduct on the market, but essentially carries out the instructions given to it by the parent company, having regard especially to the economic, organisational and legal links between those two legal entities”. Clearly, this criterion cannot be equally applied when assessing the liability of a subsidiary for the actions of a parent company (‘downward liability’). Furthermore, if one were to only take the economic organisational and legal links into account, this would mean that all subsidiaries of an infringing parent company could be held liable, even if their economic activity has no connection with the subject matter of the infringement.

Following the opinion of Advocate General Pitruzzella, the Court of Justice decided that, in order to invoke the liability of a subsidiary, it is insufficient to prove the existence of the aforementioned economic, organisational and legal links. One must also – cumulatively – prove the existence of a specific link between the economic activity of the subsidiary and the subject matter of the infringement. Consequently, from the point of view of subsidiary liability, a group of companies (such as a conglomerate) may consist of several economic units and thus undertakings, varying with the subject matter of the infringement and the economic activities carried out by the different entities. As highlighted by the ECJ, the concept of ‘undertaking’ is a dynamic, functional concept that requires an in concreto assessment.

As always, the judgement by the ECJ raises at least as many questions as it solves. For example, debate will undoubtedly arise on the exact meaning of “a specific link between the economic activity of the subsidiary at hand and the subject matter of the infringement”. One might also wonder whether this reasoning can be applied to sister companies as well. Considering the foundations of the ECJ’s argument – the personal liability of the undertaking as an economic unit – there appears to be no convincing reason why this would not be the case. At first sight, the twofold criterion developed to hold the subsidiary company liable can be of equal use for the liability of sister companies. Of course, One Never Knows, Does One?

In any event, the judgement of the ECJ once again has far-reaching consequences. Not only does it alter the way in which we need to understand the concept of ‘undertaking’, which is at the heart of articles 101-102 TFEU and its entire enforcement system. It also increases the jurisdictions in which an action for damages can be initiated according to the applicable rules of international private law. Furthermore, it reaffirms the increasing spillover effects of the public enforcement of EU competition law on the private enforcement thereof. Indeed, ladies and gentlemen, we have entered the era in which an innocent subsidiary company can be held liable to pay damages for the infringement committed by its parent company.

Private enforcement

Speaking of the private enforcement of EU competition law, one could argue that there is nothing extraordinary about the judgement of the ECJ (except for the notion of ‘undertaking’, of course). Indeed, the ECJ mainly reiterates its previous case law. However, it is precisely the usual phrases that continue to be extremely fascinating. For example, it is generally accepted that an action for damages resulting from an EU competition law infringement finds its legal basis in the applicable national damages law. The ECJ, however, deduces the applicability of the autonomous concept of ‘undertaking’ directly from the full effectiveness of article 101 TFEU (and per analogiam article 102 TFEU). In addition, it continuously proclaims that “any person is […] entitled to claim compensation for the harm suffered where there is a causal relationship between that harm and an agreement or practice prohibited under Article 101 TFEU”.

The ECJ thus derives the right to claim compensation directly from articles 101-102 TFEU. In line with the opinions of some distinguished Advocates General – such as W. van Gerven, J. Kokott and N. Wahl – I continue to preach that the right to damages at hand constitutes an EU right to damages, accompanied by its constitutive conditions that are to be derived from EU competition law (such as ‘harm’ and ‘causal link’). This would alter the very foundations of the private enforcement of EU competition law and the way we should answer the many questions it raises. Given the burdensome genesis of the Damages Directive 2014/104/EU and the traditional reluctance of the EU Member States to harmonise their national damages laws, this point of view will undoubtedly go on to attract a lot of criticism. Luckily, that is exactly what academics are for.

Michiel Verhulst
KU Leuven – FWO

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