Cartel Investigations

Cartel investigations still on the rise

Competition law has proven to be a high-risk area for companies in many different industries all over the world. Multi-jurisdictional cartel investigations are of increasing importance to businesses around the globe, with legal and compliance departments investing heavily in competition expertise. This is also true for the European Union where both the European Commission ("Commission") and National Competition Authorities ("NCA") are taking a clear stance on competition law violations. The recent investments by the Commission into digital investigation intelligence, a newly established data analysis unit, and the whistleblower hotline are starting to pay off for the enforcer: According to the Commission, 25 percent of the currently opened cartel investigations are started by the Commission on its own initiative.

In recent years, the Commission has also expanded its enforcement focus to industries which had not been in the spotlight in the past, like financial services or digital markets. Further, the Commission has targeted some atypical cartel cases which are based on rather novel theories of harm. This adds further uncertainty to the cartel proceedings. Big data, algorithms and competition for innovation have become buzzwords for modern competition law enforcement and we expect to see a further rise in antitrust investigations in these industries, both on an EU level as well as on a national level within the EU Member States.

When it comes to cartel investigations, being prepared is key to being able to react appropriately during a dawn raid and master the subsequent proceedings in the best possible way for the company. In the following paragraphs we will provide an overview of the legal framework, the relevant institutions, and the different stages of a typical Commission cartel investigation.

Legal framework and relevant institutions

The Treaty on the Functioning of the European Union ("TFEU") provides the rules to implement a system of undistorted competition, substantially unchanged for decades. Investigations into alleged cartels or other forms of anti-competitive agreements between companies (Article 101 TFEU) as well as unilateral measures by market dominant companies (Article 102 TFEU) constitute an important pillar of European competition law enforcement. Both provisions are directly applicable in all EU Member States and can be enforced by the Commission as well as by NCAs.

Council Regulation (EC) No. 1/2003 ("Regulation 1/2003") sets out the Commission's powers during the different stages of an investigation. The Commission has published best practice guidelines as well as an internal manual of procedures which provide useful information on how the Directorate General for Competition ("DG Competition") runs investigations.

The Commission acts as the European competition law enforcer. Regulation 1/2003 grants considerable powers to the European Union's executive body to ensure that the Commission can effectively guard the adherence to competition law rules in the Treaty. Within the Commission there are generally two hearing officers responsible for ensuring the rights of accused undertakings, especially impartiality and objectivity of competition proceedings.

The Commission also takes a central role in the European Competition Network ("ECN"). The ECN consists of the Commission and the NCAs in the EU Member States. The ECN provides means to ensure an effective and coherent cross-border application and enforcement of competition law within the European Union.

Upon appeal, Commission decisions in cartel cases are subject to examination by the General Court (formerly referred to as Court of First Instance). Ultimately, the European Court of Justice ("ECJ") is responsible for appeals on the point of law against General Court decisions.

Considering the complexity of EU level cartel investigations and the authorities involved, it comes as no surprise that cartel cases may last many years starting from the authorities' first investigative steps to a final potential decision by the ECJ.

Overview of a typical EU commission cartel investigation

Initiation of Proceedings

The Commission can start proceedings either on its own initiative, on the basis of a third-party complaint, or via a leniency applicant blowing the whistle on a cartel conspiracy. While third-party complaints usually mark the beginning of an abuse of dominance-probe, cartel cases are often triggered by leniency applications which are followed by dawn raids. The Commission stated that it has significantly increased the number of cartel investigations opened at the Commission's own initiative to 25 percent of the currently launched investigations. This mainly results from the Commission's investments into digital investigation intelligence, the whistleblower hotline, and its newly established data analysis unit which uses data-mining and algorithms to scour information for specific patterns indicating collusion.

Leniency Applications
Leniency applications mark the typical start of a Commission investigation into an alleged cartel. In order to win the race for leniency, an undertaking can set a "marker" with DG Competition, i.e. file an abridged application for a reduction of fines and submit detailed information within a certain period of time thereafter in order to secure its rank under the Leniency Program. Cooperating with the Commission in the investigation can result in full immunity from fines for being first-in or substantial fine reductions for subsequent applications. The different cooperation scenarios are laid out in the Commission Notice on Immunity from fines and reduction of fines in cartel cases ("Leniency Notice").
Dawn Raids
DG Competition has extensive powers to conduct unannounced inspections ("dawn raids") when there is an early suspicion of competition law infringements. As long as the scope of the inspection is limited to business premises, no judicial search warrant is needed. Commission inspectors – usually supported by national inspectors – make use of their extensive rights. Undertakings are liable for obstructions of these inspections such as destroying or withholding of evidence with potential fines of up to one percent of the undertaking's annual turnover. On site, the Commission is empowered to examine books and business records both in digital and hard copy format, take copies, seal particular objects, and interview employees at all levels (Article 20 Regulation 1/2003).

In recent years the Commission's focus has shifted towards e-dawn raids where the Commission requests large amounts of electronic data which it then reviews on its own mobile servers at the undertaking's premises.

Dawn raids hit companies rather unexpectedly and are often disturbing for the operational business. As mistakes during the dawn raid can be very costly and may jeopardize the companies and employees' defense position, dawn raid preparation is key. It is highly advisable to have a specific process for Commission dawn raids with designated antitrust advisors established to regularly train the in-house dawn raid team, and to have IT system administrators trained and prepared to provide the inspectors with easy access to the IT infrastructure.

A very sensitive and important topic throughout the entire investigation and specifically during a dawn raid is the protection of legally privileged documents. Generally speaking, only communication with or prepared for, external lawyers, which have taken place after the initiation of the administrative proceedings, can be legally privileged under EU law and can therefore be withheld from inspection. Prior communications can only be regarded as privileged where they relate to the subject matter of the procedure. Other documents and data need to be provided upon request as long as they fall within the scope of the investigation.

The duration of such inspections depends – amongst other factors – on the scope of the investigation, the company's size, and the amount of data requested by the Commission. Inspections at the companies' premises can last several days and may be continued at DG Competition's offices in Brussels if the data volume to be reviewed by the officials is very large.

Additional Investigative Powers

Before the Commission initiates formal proceedings, it gathers information relevant to the specific sectors in order to uncover competition law infringements and to collect evidence of such alleged violations. Commission investigations are driven by the ex officio principle. The authority is under a duty to investigate all facts relevant to the case diligently and impartially. In addition to the powerful investigative tool of dawn raids, Regulation 1/2003 equips the Commission with a range of additional powers typically applied by DG Competition in cartel investigations:

Requests for information: In order to carry out its duties under Regulation 1/2003, the Commission may issue a Request for Information (Article 18 Regulation 1/2003). The submission of incorrect or misleading information can be fined with up to one percent of the undertaking's total annual turnover (Article 23(1)(a) Regulation 1/2003).
Power to take statements: Further, the Commission has the power to take statements and may interview any natural or legal person for the purpose of collecting information relating to the subject-matter of the investigation (Article 19 Regulation 1/2003).

Initiation of Formal Proceedings, Statement of Objections and Oral Hearing

The opening of proceedings is a formal act by the Commission which is notified to the parties and usually also to the public. The Commission can formally open the proceedings in different ways. Typically, DG Competition opens formal proceedings by issuing a so-called Statement of Objections ("SO") to the companies under investigation. The SO lays out the Commission's position and must contain all facts and evidence necessary for the final decision.

The main purpose of the SO is to inform the undertakings about the concrete competition law charges against them and to enable them to exercise their rights of defense. Informal meetings could be held before the SO is issued, helping the companies to understand the Commission's views on the status of the case. The cover letter to the SO explains the rights of the addressees and sets a deadline for the reply.

The issuing of the SO usually also marks the point in time where the companies under investigation receive access to the Commission's file. Access to the file is part of the companies' right to be heard and constitutes a very important element in the companies' defense strategy: It provides the opportunity to inspect any potential leniency application and consecutive statements of other cooperating parties involved in the investigation. Depending on the scope and complexity of the SO and the size of the Commission's file, companies are usually granted a period of six to 10 weeks to file their reply to the SO ("Reply").

Where documents are submitted as part of the Reply, confidentiality should be claimed for those documents containing business secrets and other confidential information to prevent them from being disclosed to other parties.

In case one of the companies involved requests an Oral Hearing, this will usually take place following the Commission's receipt of the Replies. The Oral Hearing is held by the Hearing Officer and provides the Commission as well as the companies involved with a forum to discuss their case and exchange arguments on the facts and legal analysis.

Decision and Settlement

The procedure generally comes to a close with the Commission adopting its final decision in which it can impose substantial fines. In most cases the publication of the decision is preceded by a State of Play meeting. In this meeting, the Commission presents its conclusions to the company.

Only when the Commission is convinced of a competition law infringement based on meaningful and consistent evidence, it can adopt a decision and impose fines. Fines for infringements of Articles 101 and 102 TFEU can go up to 10 percent of the company's total annual turnover. In setting the fine, the Commission weighs different factors such as gravity and duration of the infringement as well as the role of the undertaking in the infringement. The details on the fining method are laid out in the Commission's Guidelines on the method of setting fines. After years with very significant fines (€3.7 billion in 2016; €1.9 billion in 2017), the Commission again imposed accumulated fines of €0.8 billion in 2018, €1.5 billion in 2019, and €0.3 billion in 2020. With the cartel investigations currently pending in Brussels, a significant increase in fines is expected for 2021.

In recent years, many cartel cases have been settled between the Commission and the companies under investigation. Such settlements usually take place before the submission of the SO. However, recent cases have also shown that even after the submission of the SO, and even after the companies under investigation have filed their Reply to the SO, a slot for settlement negotiations with the Commission may open up. It is the essence of settlements that the settling companies acknowledge their misconduct and their liability and in return may receive an (additional) reduction of the fine of up to 10 percent based on the Commission Notice on the conduct of settlement procedures in cartel cases ("Settlement Notice"). On the part of the participating undertakings, this has the advantage that further money and resources can be saved as the procedure is expedited.

Typical follow-on: cartel damages claims

Since the Commission has no power to award damages to victims of a cartel, civil cartel damages litigation has increased significantly in recent years. Both the European Courts and the Commission have pushed this development and called for effective means to recover cartel damages before national civil courts.

Such "follow-on" litigation can prolong the lifetime of cartel cases significantly. The risks of such claims by companies who may have suffered damages, for instance through the payment of cartel overcharges, must already be carefully considered by the companies under investigation during the Commission proceedings, e.g. when determining leniency or settlement strategies.

Conclusion

Cartel investigations are still on the rise and constitute a high-risk area for companies around the globe, bringing along everything companies need to avoid: Cartel cases have a very long lifecycle from dawn raids to follow-on litigation, are costly, bind a lot of resources and can damage the reputation of the companies involved.

The experience shows that preparation is key for companies to master the dawn raid situation as well as the subsequent cartel proceedings in the best possible way.

Dr. Christoph Wünschmann Partner Hogan Lovells Munich T +49 89 29012 432 christoph.wuenschmann@hoganlovells.com	Christoph Wünschmann advises clients with a focus on German and European antitrust and merger control law. Christoph deals with all competition aspects of M&A transactions. He handles merger filings with the European Commission and the German Federal Cartel Office and coordinates filings worldwide. He represents companies in cartel investigations and represents his clients in antitrust-related court proceedings, including follow-on damages claims. Christoph also advises on all kinds of corporate and commercial agreements (joint ventures, cooperations, distribution, R&D, technology transfer), as well as abuse of dominance issues. Christoph teaches European competition law at the MLB master class at the Freie Universität Berlin and is a regularly recommended lawyer for competition law in all major legal directories.

Christian Ritz, LL.M. (USYD) Partner Hogan Lovells Munich T +49 89 29012 432 christian.ritz@hoganlovells.com	Christian Ritz handles complex antitrust and competition law matters, multi-jurisdictional authority investigations as well as internal investigations, and compliance issues. In particular, Christian's practice focuses on representing his clients in dawn raids and providing them with strategic guidance and legal advice in multi-jurisdictional investigations, including complex internal investigations. Additionally, Christian represents his clients in cartel damages litigation and regularly advises them on the development and implementation of global compliance systems. Christian defends his clients against compliance violation claims and advises them in civil litigation cases following compliance breaches. He also advises on merger control as well as regulatory issues. Christian publishes and speaks regularly on topical issues in the field of antitrust, investigations, and compliance.