European Funds Comment: Highest European Court Holds Parent Companies Liable for Cartel Damages of Subsidiaries

22 March 2019
Issue 72

In an important ruling last week, the European Court of Justice (the ECJ) – the EU’s highest court – held that a parent company’s liability for damages in a civil follow-on action follows the same path as liability for antitrust fines. The Court’s judgement on this previously unresolved question has wide-ranging consequences for private equity fund managers and their investors, who may find themselves unexpectedly responsible for a breach of European competition law.

In the context of fines for cartel conduct – and other forms of anticompetitive behaviour – it has long been established that, if a parent company has “decisive influence” over a subsidiary, then it is jointly and severally liable with it for any penalties, on the basis that the entities together form a “single undertaking”. For wholly-owned (or near wholly-owned) subsidiaries, there is a presumption of “decisive influence”.

As we reported last autumn, the EU General Court confirmed in the appeal in the Prysmian case that the principle of “parental liability” also extends to financial investors. As a result, the relevant private equity fund in that case was held to be jointly and severally liable for the participation of one of its portfolio companies in a cartel. This was despite the fact that the fund had no knowledge of, or involvement in, its portfolio company’s anticompetitive behaviour and that the cartel actually pre-dated the investment. (That case is currently on appeal from the General Court to the ECJ.)

As the national competition laws of EU member states are modelled on EU competition law and must be interpreted in accordance with that law, the concept of parental liability also exists domestically. Until now, however, it has been uncertain whether the same principle of parental liability also applies to civil follow-on damages claims arising from the underlying fining decision.

Last week, the ECJ found that this was, in fact, the case. The question was the subject of a referral by the Supreme Court of Finland in a case involving three companies who had acquired targets that had participated in cartels. The three companies argued against liability for damages on the basis that, among other reasons, the principle of parental liability applied only to fines and did not extend to damages in a civil claim under Finnish law.

Finnish law is silent on the attribution of liability for damages caused by an infringement of EU competition law. The Finnish rules on civil liability are based on the principle that only the legal entity that caused the damage is liable. Consequently, the question arose whether liability for damages arising from anticompetitive conduct must be determined in line with EU competition law, or Finnish civil law. The Finnish Supreme Court referred this question to the ECJ.

The ECJ held that “actions for damages for infringement of EU competition rules are an integral part of the system for enforcement of those rules, which are intended to punish anticompetitive behaviour on the part of undertakings and to deter them from engaging in such conduct”. The concept of “undertaking” (which, in EU competition law, covers all companies operating as a single economic unit under common control) could not, therefore, have a different scope for the imposition of fines than for the award of damages. In short, the ECJ took the view that allowing parent companies to escape liability for damages under national civil law would defeat the purpose of effective enforcement of EU competition law.

As a result of this decision, the potential liability for parent companies – including private equity sponsors – has significantly increased, putting further pressure on competition law due diligence and ongoing policies and procedures, and making the outcome of the Prysmian appeal even more crucial.