REGULATORY: EU Competition Law: The Cost of Compliance – Breaking Seals in European Commission Investigations By Suzanne Rab

by King & Spalding

The Court of Justice of the EU (“Court of Justice”) has dismissed an appeal by the German energy company E.ON Energie AG (“E.ON”) against a lower court’s judgment upholding a European Commission (“Commission”) decision imposing a fine of EUR 38 million (approximately USD 49 million) on E.ON for breaking a seal during an EU competition inspection or “dawn raid”.

The practices at issue involving E.ON in this case are not isolated areas of Commission enforcement; nor is the case unique to the energy sector. It is an example of a number of cases where the Commission has sanctioned procedural infringements by investigated companies that may risk interference with an investigation. Several practical insights emerge for businesses designing compliance programmes and for management and frontline staff involved in EU competition investigations.

Background to the Case

For those unfamiliar with the usage, a “seal” is an adhesive tape or sticker designed to close doors, filing cabinets and other areas where evidence relevant to an investigation may be found. The use of seals in EU competition investigations is intended to prevent evidence being tampered with or lost during an investigation. The aim is to prevent intentional interference with documents but also to aid the effectiveness and efficiency of an inspection. From a practical perspective, a Commission investigation may last a number of days and areas may be partially searched and documents incompletely catalogued or copied before the Commission can return to them.

Under Article 20(2)(d) of Regulation 1/2003 (the main EU procedural regulation governing the Commission’s information gathering), the Commission is entitled to seal any business premises and books or records for the period and to the extent necessary for its inspection. Under Article 23(1)(e) of Regulation 1/2003, the Commission is entitled to impose a fine of up to 1 per cent of total turnover in the preceding business year for intentional or negligent breach of a seal placed under Article 20(2).

On 29 and 30 May 2006, the Commission conducted a dawn raid of certain energy companies in Germany. During an inspection of E.ON’s premises, Commission officials placed a seal on an office door, in order to secure documents. The seal displayed a warning that breach of the seal could lead to the imposition of fines.

On the second day of the inspection, the Commission discovered that the seal been broken. A “VOID” message was evident over the surface of the seal, typically an indication that the seal had been disturbed. The seal had also been displaced by about 2 mm. After the seal was removed, traces of adhesive and remnants of the “VOID” message were also evident on the under-side of the seal.

In January 2008, the Commission imposed a fine of EUR 38 million on E.ON. On 15 December 2010, the General Court dismissed an appeal brought by E.ON against the Commission’s fining decision. The General Court also considered that the level of the fine imposed on E.ON was proportionate.

Judgment of the European Court

In its 22 November judgment, the Court of Justice dismissed E.ON’s appeal against the General Court’s judgment in its entirety. Aspects of the Court’s reasoning included:

Burden of proof: E.ON argued that the General Court made an error of law with regard to the allocation and the burden of proof and infringed the principle of innocence. The Court of Justice noted that the General Court correctly stated that, in the area of competition law, where there is a dispute as to the existence of an infringement, it is for the Commission to prove the infringement to the requisite legal standard. Where the Court has a doubt, the benefit of that doubt must be given to the undertakings accused of the infringement. However, the Court of Justice concluded that “[s]ince the Commission had determined that there had been a breach of seal on the basis of a body of evidence, including the breach of seal report, the General Court was entitled to conclude, […], that it was for E.ON Energie to adduce evidence challenging that finding.” As such, the Court of Justice concluded that there had been no undue reversal of the burden of proof.

Duty to state reasons: E.ON argued that the General Court failed to comply with its duty to give (adequate or logical) reasons. The Court of Justice noted that arguments relating to the durability of the broken seal may only raise a question regarding the probative value of the VOID messages if there was a causal link between expiry of the seal and the appearance of the VOID messages on it. The Court of Justice upheld the reasoning of the Commission that if there could be a successful challenge by alleging the mere possibility that the seals might have been defective or past their shelf-life, then the Commission would be deprived of the possibility of using seals. E.ON had not raised evidence establishing a defective seal so its arguments were dismissed on this point.

Proportionality: A key element of E.ON’s appeal was that the General Court violated the principle of proportionality by failing to take account in assessing the amount of the fine that the Commission had not shown that the door had been opened or any documents had been removed, damaged or tampered with. The Court of Justice noted that the fine represented only 0.14 per cent of E.ON’s annual turnover. The General Court could have imposed a fine of up to 10 per cent of E.ON’s annual turnover if the Commission had established the existence of anti-competitive behaviour that was the subject of its investigation. Therefore, the fine of EUR 38 million was not considered disproportionate in light of deterrent goals.

Commission Enforcement

This case was the first time that the Commission fined a company for breaking a seal in a competition law investigation. It was also the first time that the Court of Justice has had to review a standalone decision of the Commission in relation to a procedural infringement.

However, the case should be viewed against the growing body of cases where the Commission has punished companies for practices which it suspects may interfere with its investigations. In May 2011, the Commission levied a fine of EUR 8 million (approximately USD 10.2 million) on Suez Environnement and its subsidiary Lyonnaise des Eaux for breaking a seal that had been placed by Commission officials during an inspection into a suspected infringement of Article 101 and/or Article 102 of the Treaty on the Functioning of the European Union (“TFEU”), including through collusive tendering. The fine imposed, although not as high as the fine imposed on E.ON, reflected the fact that the companies co-operated with the Commission.

In March 2012, the Commission fined Energeticky a prumyslovy and EP Investment Advisors a total of EUR 2.5 million (approximately USD 3.2 million) for obstructing an investigation into suspected infringements of Articles 101 and/or 102 TFEU in the Czech electricity and lignite sectors. The Commission found that the companies failed to comply with a request to block the e-mail accounts of all key personnel during the inspection. An appeal has been lodged against the decision, claiming that the Commission violated the rights of defence and the presumption of innocence, that the Commission’s findings were disproportionate, and that the Commission made an error of law in determining the fine. While recognising the fact-specific nature of the issues at dispute, the categories of legal claims raised are very similar to those claims brought by E.ON and which were rejected by the Court of Justice.

Conclusion and Comment

The judgment will no doubt embolden the Commission in cracking down on what it views as procedural violations that jeopardize its competition law investigations. It comes as a stark reminder of the monetary significance of penalties not only for violating the substantive provisions of EU competition law, but also the enforcement obligations to comply with inspection visits.

The claim that the Commission acted disproportionately is often raised in challenges to decisions imposing financial penalties. This always begs the question “proportionate to what?” Should the fine for a procedural violation be proportionate to the nature and seriousness of the procedural activity found to be infringing, taking account of its wilfulness or the number of violations, or should it be proportionate to the penalty that the Commission could have imposed for the underlying substantive infringement (which infringement may or may not be proven)? Here, the Court of Justice has said that the answer to what is proportionate in the case of a procedural violation will involve some assessment of what could have been imposed for the substantive offence, if found. The judgment undeniably sends a strong message in support of the Commission’s enforcement armoury. However, some observers may find unsatisfactory the Court’s justification based on the linkage with the fine that the Commission could have imposed had the Commission established the existence of the anticompetitive practices it was seeking to root out.

Practical Learnings

Even inadvertent interference with seals can incur financial penalties. Given the spectrum of occurrences that could fall on the wrong side of the line of compliance, the following are some practical tips for risk management.

  • Ensure that dawn raid guidelines and staff training provide specific guidance on the role and importance of seals in competition investigations and the potential consequences of breaking them.
  • Sealed doors, sealed cabinets and seals themselves should not be touched, removed or tampered with during an inspection even for innocent purposes such as cleaning a room or recovering personal belongings left in a sealed room or cabinet.
  • All members of the company and third parties on the premises (including contractors who may access the premises once the inspecting officials have left) should be informed not to break seals.
  • Steps should be taken to ensure that seals are not unintentionally broken, including identifying sealed areas using protective markers and banners if there is any risk that seals may be interfered with.
  • If seals are broken inadvertently ensure that the company draws this to the attention of inspecting officials and explains the circumstances, for example, if seals become loose or damaged.

If there are disagreements between company representatives and Commission (or national authority) inspecting officials as to the procedure that was followed, ensure that any company objections, clarifications and explanations are noted on the minutes of inspection.



Written by:

King & Spalding

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