It’s getting more expensive to talk in Europe

In June 2006, the European Competition Commissioner Neelie Kroes launched new fining guidelines that were intended to reform and, ultimately, increase the deterrent effect of the Commission’s fining policy for infringements of EC competition law. In summary, companies that breach the competition rules will now pay a fine starting with the ‘basic amount’ (up to 30 percent of sales in the relevant market, a figure which is then multiplied by the number of years of participation in the cartel), to which is added a new ‘entry fee’ (between 15 percent and 25 percent of the yearly relevant sales, whatever the duration of the infringement). Repeat offenders (and there are many) would see their fine further increased (by up to 100 percent). Overall, the total fine cannot exceed 10 percent of a company’s overall annual turnover.

In decisions taken before the introduction of the new guidelines, the Commission was already increasing the level of fines, so much was expected under the new guidelines. Commentators naturally predicted that the guidelines would herald massive further increases.

And yet so far the fines have not lived up to the hype. For example, in January, the Commission issued a decision finding a breach of the competition rules and imposing fines on producers of synthetic rubber. The Commission found evidence that manufacturers of nitrile butadiene rubber had, over a period of at least two years, cooperated with a view to raising or stabilising prices. However, the fine totalled only €34 million; indeed, the four fines to date under these guidelines amount to less than one of the last fines imposed under the old guidelines (in particular, the €990 million imposed on lift and elevator manufacturers early last year).

Is this nothing but a damp squib? Not so according to Commissioner Kroes who said recently: “Companies that engage in cartels will be found out… And when such cartels are found out, the punishment will be severe because the Commission will not tolerate companies cheating consumers and business customers by fixing prices…”.

Recent cases also give little room for optimism for companies hoping the Commission might be easing off. Quite the contrary in fact.

Whether by design or coincidence, the Commission has kicked off the new regime with decisions where either the size of the market, the duration of the cartel or the nature of the leniency applications for a reduction of fine have resulted in relatively smaller penalties. The December decision to fine flat glass producers €486 million is a good illustration: whilst this might sound significant, in the context of an industry with annual turnover exceeding €1.7 billion the fines could have been much higher. The cartel in that case lasted for just one year but if the cartel had lasted longer, or witnessed other aggravating circumstances, the fines could have been significantly greater. For example, if the same cartel acted for three years instead of one, the combined fines would have exceeded €1 billion under the new guidelines. Furthermore, the Commission chose not to apply an uplift to Saint Gobain’s €133 million fine as a repeat offender (it can double the fine) on the basis that its previous fine was some time ago. Saint Gobain does not expect to be so fortunate next time – according to public sources, it has made a provision of around €560 million to cover an anticipated fine in another, ongoing investigation. A fine at this level would beat the current highest individual fine of €497 million imposed on Microsoft for an EC competition infringement in March 2004.

Moreover, the alleged failure by Microsoft to comply with the 2004 decision (i.e., a procedural infringement) led the Commission to impose a staggering €899 million fine on the company at the end of February. With even procedural fines reaching such levels, this is a strong signal of the Commission’s fining intentions.

Not to be outdone, the UK Office of Fair Trading has also started to flex its muscles. In 2005, combined fines on cartel participants totalled almost £700,000. In 2006 that figure was just over £3 million but in 2007 companies in the airline and dairy industries paid a total of £237 million in penalties following OFT investigations.

The message is clear. Talking with your competitors can be very expensive. The continuing discovery of cartels suggests that the message has yet to be heard. However, in the UK at least, the greater use of criminal sanctions against individuals may well focus corporate minds much more effectively.

Tom McQuail is a partner at Howrey