REGULATORY: EU Competition Law: EU General Court Slashes E.ON and GDF Antitrust Fines By Suzanne Rab

by King & Spalding
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The European Commission (Commission) fined E.ON and GDF Suez over EUR 1 billion for an alleged market sharing agreement dating back to the 1970s. On 29 June 2012, the EU’s second-highest court, the General Court, gave judgment in appeals brought by the two natural gas companies. The General Court largely upheld the Commission’s decision but reduced the fines by around 40 percent from EUR 553 million to EUR 320 million, in particular because the Commission had incorrectly assessed the duration of the infringement. The judgment highlights again the Commission’s sustained competition law enforcement in the energy sector against a background of market liberalisation and also its approach to calculation of fines.

Background

On 8 July 2009, the Commission fined Germany’s E.ON and the French company GDF Suez EUR 553 million each for alleged agreements relating to their joint construction of the MEGAL (Mittel-Europäische-Gasleitung) pipeline to deliver Russian natural gas to Germany and France. Since the companies had equal interests in the pipeline, the fines imposed were equal.

The Commission launched its investigation following raids conducted in 2006 on the companies. The Commission maintained that the companies agreed to keep out of each other’s respective home markets until September 2005, being five years after the European natural gas markets were liberalised.

The fines represented the first penalty that the Commission had imposed for competition law infringements in the energy sector. At the time, concerns were voiced that the decision appeared to mark a shift in policy, since previous cases raising similar issues had been resolved without financial penalties.

Errors in Calculation of the Fine

The General Court noted that it is for the Commission to prove not only the existence of an agreement in violation of EU competition law (in this case, the prohibition on restrictive agreements contained in Article 101 of the Treaty on the Functioning of the EU (TFEU)), but also its duration. This element is relevant to assessing the nature and extent of a company’s participation in the infringement and in calculating the overall level of the fine (which is linked to a multiplier by reference to the number of years of the infringement).

  • Commencement of the infringement: According to the Commission, the infringement started in 2000 for GDF when the first EU directive on liberalisation of the EU natural gas market should have been implemented. Prior to that date, owing to GDF’s legal monopoly, competition could not have been restricted by the agreement. In contrast, there was no monopoly on the German market and the Commission found that the infringement commenced in January 1980, being the date on which the pipeline became operational. Furthermore, the Commission considered that GDF should have been regarded as a potential competitor of Ruhrgas in Germany prior to liberalisation. This was despite the existence of agreements between GDF and Ruhrgas and energy distribution companies and local authorities that benefited from an exemption from competition law until April 1998. The General Court considered, however, that this situation of exclusive supply created de facto territorial monopolies in Germany which meant that the companies could not compete with each other in Germany until April 1998.
     
  • Termination of the infringement: The General Court rejected the finding by the Commission that the infringement continued until September 2005. According to the General Court, the Commission had not given proper account to an agreement concluded between E.ON and GDF in August 2004 pursuant to which the two companies considered the anticompetitive parts of the agreement relating to the MEGAL pipeline to be void and non-binding. This had the result of reducing the duration of the infringement on the French market by 12 months. However, according to the General Court, other documentary evidence established that the agreement continued to produce effects in the German market up to September 2005.

Accordingly, the General Court held that the revised duration for the infringement on the French market was from August 2000 to August 2004. The General Court did not vary the fine due to the error relating to potential competition on the German market from January 1980 to April 1998 since the Commission had applied a duration of 7.5 years from April 1998 to September 2005 when calculating the fine.

No Breach of Equal Treatment

The General Court considered whether the Commission had violated the principle of equal treatment, since it had imposed a fine even though it had not done so in previous similar cases. On 26 October 2004, the Commission announced that territorial restrictions contained in gas transportation/service agreements entered into by Gaz de France with ENI and ENEL infringed what is now Article 101 TFEU. The Commission did not impose a fine, noting that the EU energy liberalisation process had required significant changes to commercial practices and the relevant infringements had been terminated.

The General Court stated that the Commission’s prior decision-making can give only an indication when determining whether there might be discrimination, where it is established that the facts in other decisions are comparable to the case at hand.

The General Court found that the facts of the GDF/ENI and GDF/ENEL cases were not comparable to the E.ON/GDF case that was before it on appeal. That the disputed conduct took place in the natural gas sector at a time of ongoing market liberalisation did not demonstrate sufficient comparability. The General Court noted that the previous cases were the first concerning territorial restrictions in the gas sector and were different (i.e., vertical) in nature. The General Court also considered that in the previous cases the parties were shown to have acted in good faith, whereas in the instant case the General Court found that there was evidence that the parties knew that their arrangements were unlawful, at least from the year 2000. Accordingly, the General Court found that there was no violation of the principle of equal treatment.

Attribution of Parent Company Liability

The Commission was able to inflate the original fines by calculating penalties based on the turnovers of both companies after they had completed mergers, even though the alleged infringements pre-dated completion of the relevant mergers.

E.ON Ruhrgas, created from the merger between E.ON AG and Ruhrgas, has been wholly owned by E.ON AG since January 2003. It is the largest natural gas supplier in Germany and a leading player in the EU gas sector.

GDF Suez SA is derived from the merger between Gaz de France and Suez during July 2008. A French company, it is active across the energy supply chain in electricity and in natural gas. It is the leading natural gas supplier in France and a leading player in the EU energy sector.

Referring to the Akzo Nobel case (C-97/08 P Akzo Nobel and Others v Commission [2009] ECR I-8237), the General Court observed that, where a parent company has a 100 percent shareholding in a subsidiary that has infringed EU competition law, the parent can exercise a “decisive influence” over the subsidiary and there is a rebuttable presumption that the parent does in fact exercise such influence. In such circumstances it is sufficient for the Commission to prove that the subsidiary is wholly owned by the parent in order to hold the parent as jointly and severally liable for the fine, in the absence of evidence that the subsidiary acts on the market as an independent player.

The Commission considered that E.ON should be regarded as having exercised a decisive influence and effective control over E.ON Ruhrgas, since the latter was wholly owned by E.ON since January 2003 and had not rebutted the presumption of decisive influence. This was despite the fact that E.ON is a holding company and is not engaged in E.ON Ruhrgas’ operational activity. That the chairman of E.ON’s board of directors apparently did not know of the restructuring of the details of the contractual arrangements relating to the MEGAL pipeline was not considered sufficient to establish Ruhrgas’ market independence.

The General Court’s Discretion and Concluding Thoughts

Taking account of the unlimited jurisdiction of the General Court, that it is not bound by the Commission’s decisions nor by the Commission Fining Guidelines, the General Court considered that the final amount of the fine imposed, in light of all the circumstances, should be EUR 320 million on each of E.ON and GDF. The General Court considered that if it applied the method used by the Commission, that fine would be reduced to EUR 267 million. However, it considered that this reduction would be disproportionate to the error that was found to exist. The final level of fine reflects the gravity of the infringement as found by the General Court.

The judgment by the General Court confirms that EU competition law applies to the energy sector as much as to any other sector and that market sharing and similar practices will be treated seriously. However, the General Court has accepted that the finding of a cartel at a time when the relevant markets were legally characterised as monopolies cannot be maintained.

Standing back from the facts of the case, it is clear that the Commission is strenuously pursuing alleged infringements of EU competition law in the energy sector. While the General Court has rejected part of the Commission’s methodology in calculating the fine, much of the original decision remains intact. The decision is likely to continue to spur the Commission to issue infringement decisions as a warning to other energy companies and is not likely to be lenient if it uncovers similar territorial restrictions in contracts in the future. The prospect of Article 102 (abuse of dominance) proceedings has also helped the Commission to further market liberalisation and secure extensive commitments from EU energy companies even without an infringement decision. Against this background, companies operating in the EU energy sector will want to scrutinise their own arrangements carefully, noting that playing the ‘liberalisation’ card will not always be an effective or complete defence to a competition law infringement.

Note: This briefing is based largely on the General Court’s judgment in the E.ON case. However, the press release of the General Court indicates that the General Court reached substantially the same conclusions in relation to the appeal brought by GDF Suez.


 Suzanne Rab
 London
 +44 20 7551 7581
 srab@kslaw.com

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