Europe needs tough, clear competition sanctions

Date: 08/01/1998

Valentine Korah insists the EU must replace inconsistent policies on anti-competitive conduct with non-political standards

EC COMPETITION law has come into its own, as demonstrated by the recent flexing of European Commission muscle against the Boeing/McDonnell Douglas merger.

However, if the Commission's competition policies are to build upon the respect which it earned by playing hard ball with the United States, the EU must outgrow its inconsistent, subjective policies for punishing violators and move to adopt clear, non-political standards for anti-competitive conduct.

In the absence of predictable neutral standards, the Commission's policy may be counter-productive, breeding cynicism rather than respect for competition norms.

While the Commission's principal procedural regulation (EC Regulation 1962/17) authorises fines for intentional or negligent infringement of the competition rules of up to a maximum of 10% of an enterprise's world-wide turnover, varying factors have been treated as relevant by the Commission and the European Courts in setting fines, as the recent publication of the guidelines it uses demonstrated.

These have included the turnover of the parties to the infringement, giving some weight to the size of the firms involved and their economic power. In other instances, their turnover in the relevant market has been seen as central.

The European Court frequently states that the firm "cannot have been unaware" that its conduct has been anti-competitive. In other circumstances, the EC Courts and the Commission have focused on the "gravity of the infringement". Indeed, there have been a myriad of other factors which have been seen as decisive: duration of the infringement, recidivism, financial benefit to the infringing parties or financial harm to the victims and, finally, cooperation with the Commission.

Yet, despite such a plethora of supposedly relevant factors, neither Regulation 17 nor the Commission's decisions quantify the "objective" criteria to be uniformly applied.

This vacuum creates a suspicion that fines are based less on the "merits" and more on the political clout of the enterprise or its supposed importance to a particular member state.

To avoid this appearance of unfairness, the Commission should, in a systematic fashion, identify and quantify the factors that are to be taken into consideration in imposing fines, and the weight that it accords to each factor. In this way, greater predictability and objectivity of the Commission's policies can enhance the prospect that European competition principles will be respected.

This goal is not advanced by statements by the European Court in the Michelin case that a large and sophisticated company is "expected" to "follow developments in European law attentively and to gear its policies to them".

Rather, the Commission should expect that European companies - large or small - will know what punishment will follow violation of EC law. It must be clear that "hard core" cartel activity, like that in the Polypropylene or Soda-ash cases, or the abuse of a dominant position, as in the Irish sugar case, will be dealt with decisively.

The imposition of serious fines can serve as an easily understandable warning to others that similar harsh sanctions will await them as well.

We need tough, transparent sanctioning standards to ensure that Europe's competition laws achieve necessary levels of deterrence. It is unacceptable to observe repeatedly many of the same European companies caught in restrictive and abusive practices.

Recidivists, in particular, must have no opportunity to let their own member of the Commission give them any political cover.

In my view, what is needed is greatly increased transparency and open democratic deliberations leading to consensus.

Europeans often compare the EU constitution with that of the United States of America. The US constitution was built on debate and deliberation to fashion policies in a democratic fashion - a system of checks and balances was designed to restrain autocratic power and political clout while encouraging discussion.

All institutions of the US government are expected to articulate the reasons for their decisions so that they can be understood, criticised and altered if appropriate.

The founders of the United States recognised that the strength of the government institutions they were creating rested on the imperative that, in a democratic society, there must exist a strong consensus on public policy matters.

The alternative is dictatorship. Democratic governments must generate policies through vigorous discussion outside the institution as well as within it in order to achieve policies which will be respected and followed.

As Cass R Sunstein said in his recent book entitled The Partial Constitution: "At the heart of the liberal tradition and its opposition to authoritarianism lies a requirement of justification by reference to public-regarding explanations that are intelligible to all citizens."

This liberal tradition ensures that decisions are not made to benefit those who have political clout at the expense of those who have less. Transparency makes officials and courts responsible to those expected to read their decisions, makes it easier to predict their policies and enables business people to realise the legitimate expectations of their business arrangements.

While we should not accept the policies of our friends in America uncritically, we could learn much from the so-called sentencing guidelines in cases brought by the US government under its anti-trust laws. These guidelines state clearly the factors to be taken into account in sanctioning firms determined to have violated US law.

Accordingly, the Commission should announce baseline sanctions that will be exacted in anti-trust cases. The levels should be high enough to deter and be based on the harm suffered by the consumers, multiplied several times to compensate for the chance of non-detection.

From that starting point, the Commission could use other quantified criteria, whether in aggravation or mitigation of a baseline fine.

For example, there could be multipliers from the baseline level taking into account issues such as recidivism, the duration of the infringement, the level of profit from the illegal enterprise, the degree of participation of the enterprise (eg a ringleader or a fringe player) and the degree of cooperation with the Commission during the proceedings.

With the help of more precise guidance, the Commission might be able to indicate the level of fine and the weight given to various factors when sending its statement of objections to the parties, thereby giving the parties a chance to address more precise arguments.

The Commission stood up firmly for competition in its decision to permit the merger of Boeing and McDonnell Douglas only after satisfactory undertakings were given. It should likewise take a strong stand now in favour of its own institutions and laws.

In this way, enterprises will immediately recognise that it is unprofitable to infringe the competition rules, either because of earlier precedents, or because the firm has been told clearly by the Commission of the impending penalties.

Such reform is necessary for EC competition policy to become an effective deterrent to abusive and restrictive conduct in the future.

Through articulation of such neutral principles, the Commission can send a clear signal that it intends, without concerns for politics, to deal decisively with anti-competitive practices.

It is time for that next maturing step.

Valentine Korah is professor emerita of competition law at University College, London.

Major article by Professor Emerita of competition law at University College London.