Overview
Parker-Hannifin is now a trilogy. The case (T-146/09) started with the General Court’s (GC) ruling in May 2013. The judgement was appealed to the Court of Justice (Case C-434/13P), which overturned the GC’s ruling in December 2014 and remanded the case. The GC issued its second judgment (T-146/09 RENV) on July 14, 2016. This case deals with the relationship between the principles of personal liability and economic continuity. While these principles may sound academic and unimportant, they are, unfortunately, unavoidable. So, it is worth spending a couple of minutes with Parker Hannifin.
Background
The case begins with Marine Hoses, where the European Commission (EC) found that a number of undertakings involved in the marine hoses business had infringed Article 101 TFEU. The parent company, Parker-Hannifin and its infringing subsidiary, Parker ITR, were among the decision’s addressees. The EC concluded that Parker ITR had participated in a cartel from April 1, 1986 until May 2, 2007. Unfortunately, for Parker-Hannifin, it had acquired the infringing marine hoses business on January 31, 2002, while the business was in the middle of a cartel.
Parker-Hannifin’s and Parker ITR’s liability came into question because of how Parker ITR was structured pre-acquisition and the timing of when it was acquired (mid-cartel participation). The chain of events follows:
- 1993: Saiag SpA acquired ITR SpA (ITR), which had a marine hoses business;
- June 27, 2001: ITR SpA created a subsidiary, ITR Rubber Srl (ITR Rubber);
- December 19, 2001 (with effect from January 1, 2002): ITR SpA transferred its marine hoses business to ITR Rubber;
- January 31, 2002: Parker-Hannifin Holding acquired ITR Rubber. It later renamed it Parker ITR. Through a subsidiary, Parker-Hannifin holds 100% of the shares in Parker ITR.
As a result of the EC’s conclusion that Parker ITR had participated in a cartel during the noted timeframe, it held Parker ITR liable for the full period of the infringement and Parker-Hannifin liable from January 31, 2002 (when it acquired ITR Rubber) until the end of the cartel on May 2, 2007. The EC relied on the economic continuity principle in order to hold Parker ITR liable for the full duration of the infringement. The principle of economic continuity provides that a legal person that takes over the infringing assets (the marine hoses business) after the period of infringement may also be held personally liable for the infringement if the legal person that ran the infringing assets during the period of infringement either:
- Has ceased to exist; or
- Is part of the same group, i.e. in cases of intra-group transfers of infringing assets.
If infringing assets are transferred to an independent legal entity, there is no economic continuity. It is the exception to the principle of personal liability, which is the notion that the legal person that ran the infringing assets at the time of the antitrust violation must answer for the illicit behavior, even when a different legal person has taken control of the assets at the time the infringement decision is adopted.
The GC’s Misstep
In its first judgment, the GC annulled the EC’s decision. The GC took a close look at the two-step process that transferred the marine hoses business to Parker-Hannifin and decided that the first step in the transfer process, when ITR transferred all of the marine hoses assets to the newly-created ITR Rubber, should be ignored. The reason for ignoring it: the intra-group transfer had been done so that ITR could complete the second step in the process. It could then sell the marine hoses assets to an independent third party. If the first step were ignored, there would be no economic continuity. It was only a matter of personal liability. ITR Rubber was established and functioning as a marine hoses business as of January 1, 2002. Therefore, it could be held individually responsible from January 1, 2002 onward. Parker-Hannifin, as a parent company, could also be held responsible from January 31, 2002. As for the marine hoses business’ anticompetitive conduct prior to January 1, 2002, when ITR participated in the cartel, the EC should have held ITR and Saiag, as the parent company, responsible for the infringement.
The Court of Justice’s (CoJ) Corrective Measures
The CoJ reached a different conclusion. The GC should not have ignored the intra-group transfer when assessing whether economic continuity applied. If you only look at the second step in the process, there were no structural links between the undertakings, so no economic continuity. But, there might have been structural links, and therefore economic continuity between ITR and ITR Rubber, if the first step had been examined. It was not acceptable for the GC to disregard the first step because it had lasted only a month and it "was clearly part of an objective of selling that subsidiary’s shares to a third undertaking." So, the GC’s ruling was overturned and remanded.
The GC’s Predictable Outcome
Principle of Economic Continuity:The GC turned its attention to ITR’s transfer of assets to ITR Rubber on January 1, 2002 and what the relationship was between the two at that time. Economic continuity existed because ITR had decisive influence over ITR Rubber. In particular, ITR’s 100% ownership of ITR Rubber’s capital permitted the GC to presume that ITR not only had decisive influence over ITR Rubber, but that it actually exercised it. The parties failed to rebut effectively this presumption (see our numerous articles, including this overview, about how the EC and courts analyze decisive influence to hold parent companies liable for their subsidiaries’ anticompetitive behavior). Therefore, ITR Rubber (now Parker ITR) is liable – due to economic continuity – for its predecessor’s behavior.
Fine the Leader: Parker-Hannifin acquired, and became the parent company of, ITR Rubber on January, 31, 2002. Therefore, it was jointly and severally liable for ITR Rubber’s/Parker Rubber’s fine from that day onward (January 31, 2002 - May 2, 2007). Unfortunately, ITR had a leading role in the cartel from June 11, 1999 until September 30, 2001 – before Parker-Hannifin had acquired the marine hoses business. Therefore, the EC had increased Parker ITR’s fine by 30%. But, the EC had also increased the basic amount of the fine for which Parker-Hannifin was liable because of this aggravating factor. The GC concluded that this was not the right thing to do. Since the aggravating factor (e.g. cartel leader position) had taken place prior to Parker-Hannifin’s liability kicking-in, the fine for which it was jointly and severally liable should not have included the 30% increase. Therefore, the GC reduced it.
10% Cap: Parker ITR was liable for a fine of € 25,610,000. Parker-Hannifin’s new fine was € 6.4 million. This meant that Parker ITR was exclusively liable for € 19,210,000. This raised the question of whether the 10% of annual turnover cap on fines had been exceeded. The GC quickly recalled recent case law (see our briefing) where the CoJ pointed out that Article 23(2) of Regulation 1/2003 clearly refers to the “undertaking participating in the infringement” and that it would be strange to have two interpretations of undertaking – one for attributing liability and another for calculating the 10% cap. Therefore, when “an undertaking regarded by the [EC] as responsible for an infringement of Article [101] is acquired by another undertaking within which it retains, as a subsidiary, the status of a distinct economic entity, the [EC] must take account of each of those economic entities in order to apply to them, where necessary, the 10% upper limit.” With this holding, the CoJ was saying that a subsidiary, while becoming part of the parent company’s undertaking post-acquisition, retains its past identity as a separate undertaking. Parker ITR’s turnover in the business year preceding the EC’s decision was approximately € 135.5 million. Therefore, the GC decreased the fine that Parker ITR was exclusively liable for to € 13,545,728.
Parting Thoughts
Parker-Hannifin has been a long journey. With a little guidance from the CoJ, the GC got there in the end. While not everyone may be happy with the outcome, it does provide some predictability. When the EC is deciding who is responsible for anticompetitive behavior it is going to track closely the infringing assets from the cartel’s inception to its very end. No one is going to get to walk away from a decision without a hefty fine. The issue just may be who is responsible for how much of it. The final judgment in this case has important consequences for businesses: they should be particularly cautious when acquiring assets from an independent third party – particularly when the seller has used a new corporate vehicle specifically for the purpose of divesting them – because the economic continuity principle will likely apply.