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Container liner dawn raids

This article was first published in Lloyd’s List on Wednesday 25 May 2011 and is reproduced with their kind permission. www.lloydslist.com

On Tuesday 17 May 2011 the European Commission (the “Commission”) made several unannounced inspections at the premises of companies engaged in “container liner shipping in several member states”, on the grounds that they had “reason to believe” the companies may have breached EU cartel or monopoly-abuse rules, including conspiring to fix prices and/or capacity on major shipping routes. It is to be noted that the carrying out of the “dawn raids” does not mean that the companies are guilty of anti-competitive behaviour.

The EU competition authority has been increasing the level of scrutiny directed at the liner shipping industry since the “Block Exemption Regulation” on liner conferences (Regulation 4056/86) ceased to have effect in October 2008. The Block Exemption Regulation permitted conferences to set prices and agree capacity, activities which would otherwise have constituted serious infringements of the European Competition rules.

Now it’s the turn of the shipping industry

Only in December last year, the Commission concluded a massive investigation of price fixing in the air cargo sector, in which European and Asian household name carriers were found to have infringed the competition rules and had fines of tens of millions of Euros imposed upon them. These same companies are now facing actions for damages from their customers in the European Courts, who claim they suffered a loss (in the form of increased charges) as a result of the cartel. The investigation of the air cargo cartel commenced with dawn raids across Europe in May 2006, after Lufthansa blew the whistle on the practice. The implications for Liner companies are therefore clear.

What prompted the dawn raids?

It is possible that the Commission suspects some form of agreement between companies over capacity and/or rates since the Block Exemption Regulation ended. This agreement may take the form of an overt agreement. However, in antitrust enforcement, there is no need for there to have been an “agreement”, in the conventional sense of the word: discussion with competitors of future price or capacity intentions is also often enough to establish an infringement. Further, the Commission does not have to establish the effect of the conduct in question upon the market. It only has to demonstrate that the effect was likely to have been a restriction of competition between the Liner companies.

It is not clear yet whether the Commission’s dawn raids were precipitated by a tip off received from a whistleblower, or whether the Commission acted on its own initiative. However, in nearly all hard core price fixing cartel cases, there is a whistleblower. Without one, it can be very hard for the Commission to have any idea of the potential timeframe of the infringement, or of the identity of the individuals likely to have been involved.

The powers that the Commission has

During the dawn raids (which in most cases went on for more than one day) the Commission used its wide and intrusive investigative powers. It will have copied hundreds of thousands of emails (included those consigned to “deleted items”) sent and received by individuals who it suspects may have contacts with competitors (legitimate or otherwise). Electronic calendars will have been copied and used to determine when important meetings took place. The Commission may also be able to draw on witness evidence from individuals employed by any leniency applicant. It is even not unknown for company executives to have tape recordings of their conversations used against them.

The Commission has no absolute right to force employees to attend interviews. However, during the dawn raid, the Commission is entitled to ask company employees questions about the factual content of the documents that the Commission obtains copies of. It can also ask employees about meetings that they may have attended. The Commission will often ask questions to which it already knows the answers (for example, from a leniency applicant). In circumstances where an individual fails to give complete or accurate information in response to specific questions, the Commission has the power to impose heavy fines.

Strategic options for the companies involved

Now the dawn raids are over, companies need to decide on their strategy. Before they can reach any sensible decision on this they need to determine the level of their exposure to fines for breaches of the antitrust rules. They need to review all of the documentation that the Commission has taken, and talk to the employees who were potentially involved.

It is important to reassure employees, to make them comfortable enough to be frank about what they may or may not have been involved in.

The companies involved are about to find out that the document review is a very resource intensive exercise, as the amount of documentation taken by the Commission will likely run into hundreds of thousands of pages. A decision should be taken early on how the documentation is to be organised. It is generally recommended to consider instructing forensic IT experts, who will be able to manage the data effectively, and provide sophisticated document search functionality, which will significantly reduce the document review burden.

If a company believes that it has been involved in an infringement, it needs to consider whether to apply for leniency - i.e. a reduction in fines in exchange for enhanced cooperation. In essence, now that the dawn raids have taken place, the applicant for leniency will need to provide the Commission with information that it does not already have, which adds significant value to the Commission’s likely case.

At this stage, there is only a small possibility that 100% immunity will be possible. However, there is every likelihood that the next company through the leniency door will obtain a 50% reduction to any fine. Subsequent applicants could also obtain smaller reductions in the region of 20%.

The decision to go for leniency can only be taken once a company has (i) reviewed all the information that has gone to the Commission (in order to ascertain whether there is a risk that it will be found to be guilty of an infringement) and (ii) conducted its own internal audit of information that the Commission has not taken which may nonetheless add value to its investigation.

If a company decides to fight the investigation (irrespective of whether or not it considers that it has committed an infringement), it will need to avoid any finding by the Commission that it is not cooperating (which would likely lead to fines).

If a company considers that it is at risk of an adverse decision, it should seek to minimise the scope of the decision. It should fight any suggestion that it was the instigator of the illegal conduct, and very importantly, it should seek to minimise the duration of the illegal conduct that the Commission is investigating. This may have a dramatic impact on the level of fine that is ultimately imposed (see below).

The Commission’s next steps

Once it has completed the dawn raids, the Commission will spend a considerable amount of time processing the information that it has obtained, and engaging with potential leniency applicants. It may issue further formal written requests for information to the companies under investigation.

Once/if the Commission is satisfied that it has enough evidence to make an infringement finding, it will send the companies involved a Statement of Objections (“SO”). It could take up to two or three years for the Commission to reach this stage. On receiving the SO, the companies involved will have a further opportunity to review their strategy.

Cooperation will likely take the form of a settlement agreement, whereby the company admits its guilt in exchange for a 10% reduction in the fine that is ultimately imposed upon it (effectively a type of plea bargain). Alternatively, it can attack the Commission’s conclusions, and seek to undermine the Commission’s confidence in its own case, opening the way to an appeal if the Commission maintains its position.

How fines are calculated by the Commission

If the Commission does find that there had been an infringement of competition law, for example on routes between the EU and China, it will calculate its fine in accordance with its own fining guidelines.

The Commission’s starting point when deciding on the fine will be a figure of up to 30% of the turnover, of the global group of companies to which the company under investigation belongs, in the markets in which it decides that an infringement took place. If the market is a transport market with a particular start and end point (for example, EU to China) and only one of those points falls within the EU, the Commission may base its calculations on half of the turnover achieved on that route. The relevant turnover year will be the last financial year during which the infringement took place.

For example if the Commission decides that there was a breach of competition law on the Europe-China market, between February 2008 and October 2010, it will calculate a fine based on the 2009 turnover. The length of the infringement will be deemed to be three years. The Commission may take as a basic amount a figure of up to 30% of half of the turnover that the global group achieved on the Europe-China market (the “Value of Sales”). For price fixing and quantity fixing, the Commission will start at close to 30% (as it considers these to be the most serious types of infringement). It will multiply this figure by the number of years of the infringement (three years). It will then likely add a further figure of between 15% and 25% of the Value of Sales for the purposes of deterrence. The Commission will then make additions and subtractions to its calculations where there have been aggravating (e.g. obstructing the investigation) or mitigating factors (e.g, cooperation with the Commission).

In the air cargo cartel case, the Commission fined 11 air cargo carriers a total of €800 million, for setting fuel surcharges on cargo flights. The fines were imposed on EU airlines such as BA (€104m) and non-EU airlines such as Cathay Pacific (€57m), and Singapore Airlines (€74m). The fines were set on the basis of half of the turnover achieved from all flights that either started or ended in the EU.

The Commission will compare the final amount that it reaches through the above calculations against the turnover of the worldwide group of companies to which the company belongs. It must check that the amount of the fine does not exceed 10% of the turnover of the worldwide group. The Commission will always seek to refer to the worldwide group when considering the 10% maximum limit. The subject of which company or set of companies will be included in the turnover calculation for the purposes of calculating the 10% maximum has been the subject of considerable amounts of litigation before the European Courts.

However, the Courts have generally tended to agree with the Commission on this point.

At present, it is too early to say with any degree of certainty what type of infringement the Commission is looking for, or the type of infringement, if any, it is likely to find. However, companies should brace themselves for fines that could potentially reach into the tens of millions of Euros, as well as potential civil damages actions following on from any eventual Commission infringement decision.

This article was contributed by Holman Fenwick Willan LLP. It was written by Anthony Woolich and Simon Burden in the London office and Konstantinos Adamantopoulos and Eliza Petritsi in the Brussels office, with input from Paul Hatzer in Hong Kong, and Craig Neame, Head of Liner Shipping and Logistics, in London. Each author has extensive experience of anti-trust investigations by the European Commission, with expertise on how to deal with dawn raids and their aftermath, and how to assess antitrust risk. Konstantinos and Eliza also have extensive experience appearing as advocates before the European Courts.

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