An Excerpt From: K&L Gates Global Government Solutions ® 2012: Annual Outlook January 2012 Antitrust and Competition Pleading Poverty in the Wake of the Economic Crisis: “Inability to Pay” Defense in EU Cartel Cases Recent cases confirm the European Commission’s willingness to take account, in setting cartel fines, of companies’ financial difficulties, particularly in the ongoing economic crisis. Businesses facing either the imposition of fines or of recovery measures, where fines are imposed but yet unpaid, are eligible for an ‘inability to pay’ (ITP) reduction if they can show that the full fine would put them at a serious risk of bankruptcy. The high level of fines imposed in EU cartel cases in recent years has become all too familiar. Small and medium enterprises (SMEs) and single product companies find it increasingly difficult to pay these heavy fines, especially in the on-going economic crisis. The number of businesses claiming their ITP and requesting a fine reduction on that basis has, as a result, risen significantly. ITP claims are based on point 35 of the EU Fining Guidelines. These rules entitle the European Commission to take account, at its discretion, of the critical financial situation of individual businesses. Following a strict case-by-case analysis, the agency may grant, in exceptional cases and upon request, fine reductions to companies unable to pay the full fine. In practice, a company has essentially to show that the fine would “irretrievably jeopardize [its] economic viability,” thus likely forcing it into liquidation. A mere adverse or loss-making financial situation would not be enough. Interestingly, despite these rules being in place for several years, it was only in the wake of the economic crisis that, in November 2009, the Commission accepted ITP claims for the first time. Since then, the Commission has granted significant fine reductions—between 25 and 75 percent—in a number of cases, including two cases in the last year. In March 2011, the Commission accepted a post-decision ITP claim and lowered fines imposed in 2007 in Fasteners (payment had been deferred 30 pending court proceedings). In December 2011, the Commission reduced fines in Refrigeration Compressors, showing its increased receptiveness to take account of companies’ financial difficulties in the economic crisis. As Competition Commissioner Almunia recently remarked, it is the Commission’s concern “not to provoke a company’s bankruptcy” as “competition policy is about promoting competition, not eliminating firms from the market place.” The favorable stance towards ITP claims is expected to continue at least as long as the economic downturn persists. The creation of a fully dedicated ITP team within the Commission’s Cartels Directorate confirms the agency’s long term commitment to screen ITP claims and grant relief where bankruptcy concerns are substantiated. Since they are financially more vulnerable than larger groups, SMEs and single product businesses are best placed to get relief, in particular where active in sectors especially affected by the recession (e.g., construction, metal products, and other manufacturing industries, as found in recent decisions). First, they face significantly higher fines, in proportional terms, than larger companies or diversified groups, often reaching the legal upper limit of 10 percent of total worldwide turnover. Second, they normally do not hold sufficient cash to pay the full fine, nor can they rely on cash flow from conglomerate businesses or controlling shareholders. Third, if K&L Gates Global Government Solutions ® 2012 Annual Outlook active in sectors in economic crisis, SMEs and single product companies face the additional hurdle that finding access to capital or credit is extremely difficult due to the declining demand. For example, in granting fine reductions in Bathroom Fittings and Prestressing Steel in 2010, the Commission took account of the severe financial difficulties experienced in the sectors (“dysfunctional credit markets at the height of the crisis,” as described in Commission’s articles). Companies which may face the imposition of fines as a result of an ongoing cartel investigation, or have unpaid fines outstanding, and feel especially hit by the economic crisis, might consider bringing an ITP claim if the fine would likely cause their bankruptcy. As clarified in a Commission Notice of June 2010, the criteria for benefiting from an ITP reduction vary depending on whether claims are made before or after adoption of the final decision imposing the fines. While the related information gathering is not insignificant, a company’s efforts in claiming ITP may be worth its own continued existence. Flavia Distefano (Brussels) [email protected] Neil Baylis (London) [email protected] Siobhan Kahmann (Brussels) [email protected] Anchorage Austin Beijing Berlin Boston Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt Harrisburg Hong Kong London Los Angeles Miami Moscow Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco São Paulo Seattle Shanghai Singapore Spokane Taipei Tokyo Warsaw Washington, D.C. K&L Gates includes lawyers practicing out of 40 offices located in North America, Europe, Asia, South America, and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information about K&L Gates or its locations and registrations, visit www.klgates.com. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©2012 K&L Gates LLP. All Rights Reserved.