DECLINE OF THE LENIENCY PROGRAMME IN EUROPE.
IS IT WORTH TO BLOW A WHISTLE?
Dominik Wyszyński 13396358
Thesis supervisor: Dr. G. Giacomo Tagiuri
LLM European Competition Law and Regulation - Faculty of Law 2021-2022 Word count inc. footnotes: 12213
Date of submission: 30.06.2022
2 TABLE OF CONTENTS
INTRODUCTION ... 4
CHAPTER 1 - THE LENIENCY PROGRAMME ... 6
1.1 Leniency Programme – definition, history and development ... 6
1.1.1 What is a leniency programme? ... 6
1.1.2 Amnesty programme in the US – history and development ... 7
1.1.3 Leniency programme in the European Union – history and development ... 9
1.1.4. Decentralization of leniency policy in the EU ... 10
1.2. Legal basis, scope and procedures for applying for leniency ... 11
1.2.1. Legal basis and scope of leniency programme in the EU ... 11
1.2.2. Procedures and conditions to apply for leniency programme in the EU ... 13
CHAPTER 2 - DISCUSSION OF PROBLEMS RELATED TO THE FUNCTIONING OF THE LENIENCY PROGRAMME. ... 14
2.1. The risk of private actions ... 14
2.1.1. Statistics on the impact of private actions on leniency applications ... 14
2.1.2. Solutions introduced in Damages Directive ... 16
2.2. Globalization and inconsistent application of leniency programmes in different countries ... 17
2.2.1. Relationship between leniency programs and criminal prosecution ... 17
2.2.2. Technical issues arising from globalization and inconsistent interpretation ... 18
2.3. Other issues that potentially impede the proper functioning of the programme ... 20
2.3.1. Uncertainties related to other forms of cartels and the scope of Leniency Notice ... 20
2.3.2. The risk of spillover effect, marker regime and administrative burdens. ... 21
CHAPTER 3 - THE POTENTIAL SOLUTIONS FOR MAKING LENIENCY PROGRAMME MORE EFFECTIVE ... 23
3.1. Are the changes necessary? ... 23
3.2. Suggestions on how to solve the private damages problem ... 25
3.2.1. Limitation of leniency applicant's liability ... 25
3.2.2 Introduction of Fair Funds institution ... 26
3.3. Suggestions on how to solve the globalization and inconsistent interpretation problem... 27
3.4. Introduction of Amnesty/Leniency plus programme ... 30
BIBLIOGRAPHY ... 35
My paper will focus on discussing the current state of the leniency program, which has experienced a significant decline in applications over the past several years. I will discuss what exactly the leniency program is, its importance, how it has evolved, and what it looks like today. There are many factors why this program is less popular than it once was, of which the most important are the increased number of private actions concerning cartel cases, especially after the introduction of the Damages Directive (2014/104/EU), and globalization and inconsistent application of leniency programs in different countries. I will suggest changes that the European Union and other National Competition Authorities could introduce to prevent the decline of applications and increase its attractiveness, referring also to solutions and experiences in the United States and certain European Union countries.
The leniency programme is an essential tool in Cartel investigations. It offers either total immunity from fines or a reduction from the fines to undertakings involved in a cartel. It also helps the Commission to discover secret cartels and to obtain insider evidence of the infringement. On top of that, the programme has a deterrent effect on cartel formation and it destabilizes the operation of existing cartels by creating distrust and suspicion among cartel members. Therefore, the proper functioning of the program and maintaining its popularity are crucial to effectively detecting and combating cartels as well as preventing their formation and building distrust among its members.
In my paper, I will discuss the development of the leniency program, how it functions, the reasons behind its declining popularity and effectiveness, and propose solutions for increasing it. I will also answer the question of whether the leniency program can still be attractive to potential applicants and what needs to be done to convince cartel members to blow the whistle. The importance of this issue is that the leniency program is not only the most effective tool to detect cartels, but it is also effective in creating distrust within a cartel and preventing its formation, which strongly argues for working on its improvement instead of looking for other cartel detection methods that do not have such a strong deterrent function.
The EU leniency programme is based on the US amnesty programme introduced in 1978 in the US and substantially revised the programme with the issuance of the Corporate Leniency Policy in 1993 and a Leniency Policy for Individuals in 1994.1 Since its introduction in the United States, the detection of cartels has increased significantly and it has become an essential tool to counter hard-core agreements. In 1996, the European Union introduced its own leniency programme adapted to the European market. The main characteristics of the programme are currently provided in the 2006 Notice on immunity from fines and reduction of fines in cartel cases.2
For years, this programme only applied to competition infringements affecting trade between member states, while cartels operating within one member state fell under the jurisdiction of
1 The Division’s Corporate Leniency Policy and Leniency Policy for Individuals
2 Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11)
5 that state, which did not have to implement a corresponding programme in its legal system at all. However, in 2021, the ECN+ Directive3 came into force, which established a minimum harmonization for having and enforcing a leniency programme, forcing the application of a leniency programme across all member states as well. The legal bases for this programme at the EU level are the Commission Leniency Notice, the ECN Model Leniency Programme4 and the newly introduced ECN+ Directive.
Recently, the number of leniency applications has been dropping significantly. From 46 in 2014, to 32 in 2015, to 24 in 2016, and to 18 in 2017 and 17 in 2018.5 Many reasons may explain why the programme is getting less and less popular. One of them is the increased risk of private actions which are not covered by immunity and the introduction of a new Damages Directive6 that makes it much easier to seek redress by private parties. The other is the uncertainty concerning jurisdiction because of the decentralized leniency system across Europe which have different regulations and requirements for leniency applications. Also, ongoing globalization is increasingly creating situations where one cartel can be assessed by multiple legal systems, not just within the European Union. All the above-mentioned reasons can lead to the situation when the cartel members can decide that applying for leniency is not worth the potential risk.
In my paper I will present ideas on how to improve the attractiveness of leniency program both in terms of private actions and globalization and inconsistent application of leniency programs in different countries. I will begin my discussion of improvements to the leniency program by discussing whether changes are needed at all and whether the decline in applications is not simply the result of successfully fighting cartels and decreasing the number of them. Next, I will present proposals on how to deal with the problem of private actions, primarily focusing on the introduction of subsidiary liability and the institution of Fair Funds.
I will then discuss the problems associated with globalization and inconsistent applications for leniency in different countries, and propose several solutions to improve cooperation between
3 Directive 2019/1 of the European Parliament and of the Council of 11 December 2018 to empower the competition authorities of the Member States to be more effective enforcers and to ensure the proper functioning of the internal market
4 ECN Model Leniency Programme (As revised in November 2012)
5 Global Competition Review, Rating Enforcement (2019) 2019
6 Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union
6 competition authorities in different jurisdictions. Finally, I will discuss and propose the introduction of the Leniency plus programme, which is successfully operating in the United States as well as in some European Union countries.
CHAPTER 1 - THE LENIENCY PROGRAMME
1.1 Leniency Programme – definition, history and development
1.1.1 What is a leniency programme?
Fighting cartels is a major objective of competition law. These kind of hard-core agreements between competitors have a devastating effect on the market. They lead to increase the cost of materials and components for the purchasers and reduce the need for innovation in terms of product development and the introduction of more efficient production methods. Moreover, it can result in artificial prices and decrease in the number of different products on the market, which in a long run can lead to loss of competitiveness and reduced employment opportunities.7
Detection of cartels is very difficult and without the cooperation of the undertakings or individuals involved almost impossible, because all the cartels are secret by their very nature.
Therefore, cooperation between the members of the cartels and the Commission or the National Competition Authorities is essential for the effective detection of cartels. In order to persuade the members of these agreements to cooperate, the European Union and individual member states decided to introduce a leniency programmes, which reduces or completely exempts from penalties undertakings that wish to withdraw from an illegal agreement and cooperate with the investigation.
In order to apply for leniency programme the undertaking has to meet a number of conditions.
Furthermore, the fulfilment of conditions does not guarantee immunity from fines because applying for full immunity requires from company to be the first cartel member to blow the whistle. All subsequent cartel members who decide to leave the cartel and cooperate in the proceedings can only expect a reduction of their fine. Applying for leniency runs the risk that
7 Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11)
7 another cartel member has done it first and the company is never sure whether it has a chance of getting immunity or just a small reduction in the fine.
Leniency programmes are designed to encourage individual cartel participant to self-report based on the "prisoner's dilemma" and to incentivize conflicts between cartel and cartel participants.8 The "prisoner's dilemma" is a term introduced by Albert W. Tucker9 that illustrates very accurately the situation in which cartel members find themselves when faced with a leniency programme. This means that a cartel has only a very small chance of being detected if all of its members cover up for each other and do not cooperate with the commission, but no cartel member can be sure that the other members do not cooperate with the Commission or the National Competition Authority. As a result, the larger the cartel, the more distrust there is of the other members. In effect, cartel member is unable to determine whether it is more risky for him to remain in the cartel with a chance of being fully fined for it but also with a chance that the cartel will not be detected at all, or whether it is more profitable to apply for leniency and receive either no fines at all or lower fines.10
1.1.2 Amnesty programme in the US – history and development
In order to present the idea and development of the leniency programme in the European Union, we should first mention the history of this programme in the United States, where it was first introduced. By the time the programme was introduced in Europe, it had already been operating effectively in the United States for many years, significantly contributing to the detection of cartels.
Today's amnesty programme was introduced in this form in the U.S. in 1993, but before that, the Department of Justice introduced the first corporate leniency policy back in 1978. The original version of the programme was little known and rarely used. As a result, an average of only one application for amnesty per year was filed during the 15 years of its existence and no
8 Beom Won, S, “An improvement of leniency programmes where there exists the coordination problem”
March 12, 2020, p. 3
9 Poundstone, W, “Prisoner's Dilemma (1st Anchor Books ed.).” (1993) New York: Anchor. ISBN 0-385-41580-X.
10 Chen, J. and Harrington, J.E. (2007), "The Impact of the Corporate Leniency Programme on Cartel Formation and the Cartel Price Path", Ghosal, V. and Stennek, J. (Ed.) The Political Economy of Antitrust (Contributions to Economic Analysis, Vol. 282), Emerald Group Publishing Limited, Bingley, p. 59-80
8 international or large national cartel has been detected.11 The programme as presented in 1978 was not successful for several reasons. The amnesty decisions were highly discretionary and the exact criteria for applying for leniency were unclear. For the most part, the undertakings did not know whether they could qualify for leniency or whether the Department had already initiated an investigation into their industry. Applying for leniency involved reporting criminal activity to state authorities juxtaposed with the unclear and uncertain benefits of potentially obtaining amnesty.12
In 1993, the corporate leniency programme was revised by the Antitrust Division to make it easier and more attractive for the undertakings to cooperate with the Antitrust Division. They introduced three important changes. First, the leniency is automatic for qualifying firms if no prior investigation is pending. Second, the leniency may still be available even if cooperation begins after an investigation begins. Finally, all officers, directors, and employees who come forward with an undertaking and cooperate are protected from criminal prosecution.13
In 1994, the U.S. Department of Justice also introduced a Leniency Policy for Individuals14, which applies to individuals who approach the Department on their own behalf rather than as part of a company. This programme provides immunity from criminal prosecution. Amnesty is granted to a person reporting illegal antitrust activity prior to the beginning of an investigation.
The amnesty programme is still based on the 1993 version, but in addition it is worth mentioning that in 2004 the Antitrust Criminal Penalty Enhancement and Reform Act of 200415 was introduced, which grants participants in the U.S. Department of Justice's leniency programme the benefit of one-time instead of treble damages, as has been the case so far for all cartel members, and no joint and several liability with co-conspirators in subsequent private damages actions. This is an important change that has resulted in a significant
11 Scott D. Hammond, Antitrust Div. Deputy Assistant Attorney Gen., Address at the 24th Annual National Institute on White Collar Crime: The Evolution of Criminal Antitrust Enforcement over the Last Two Decades (Feb. 25, 2010), p. 4
12 Bell, R, Millay, K, “The Antitrust Division’s Corporate Leniency Programme Learn from the Past or Be Condemned to Repeat It”, p. 12
13 Scott D. Hammond, Antitrust Div. Deputy Assistant Attorney Gen., Address at the 24th Annual National Institute on White Collar Crime: The Evolution of Criminal Antitrust Enforcement over the Last Two Decades (Feb. 25, 2010), p.4
14 Leniency Policy for Individuals of August 10, 1993
15 Antitrust Criminal Penalty Enhancement and Reform Act of 2004
9 improvement in the effectiveness of the U.S. programme because private damages in the United States are much more severe than in the European Union.16
The changes have definitely made the programme more attractive and significant increase in leniency applications and cartel detection can be observed. Since 1996, more than $5 billion in fines have been levied for antitrust offenses, more than 90 present of which are associated with investigations involving leniency applicants. Since the amendments, the Antitrust Division typically conducts approximately 50 international cartel investigations at any one time, more than half of which have been initiated or are ongoing due to information received from leniency applicants.17
1.1.3 Leniency programme in the European Union – history and development
Following the success of the updated amnesty programme in the United States after 1993, the European Union introduced its own leniency programme into its legislation. The European Commission adopted its first Leniency Notice in 1996. However, even before the official introduction of the leniency programme, the European Commission had already reduced fines or even abstained from fines in many cases before 1996 in recognition of cooperation.18
In 2002, the European Commission replaced its first Leniency Notice with a new one19. The main changes were that immunity became automatic, as had already been introduced in the United States in 1993, and, in addition, reductions in fines were more closely linked to the timing of cooperation.
Then another amendment was made in 200620, and since then the 2006 Commission Notice on Immunity from fines and reduction of fines in cartel cases has remained unchanged to this day. The purpose of this amendment was, inter alia, to clarify the immunity threshold in terms
16 Wouter P.J. Wils, “Leniency in Antitrust Enforcement: Theory and Practice”
17 Scott D. Hammond, Antitrust Div. Deputy Assistant Attorney Gen., Address at the 24th Annual National Institute on White Collar Crime: The Evolution of Criminal Antitrust Enforcement over the Last Two Decades (Feb. 25, 2010)
18 Examples of reduced fines include the Decision of 24 April 1986, Polypropylene,  OJ L230/1, paragraph 109, the Decision of 13 July 1994, Cartonboard,  OJ L243/52, paragraphs 169-171 and the Decision of 19 December 1984, Wood Pulp,  OJ L85/1, paragraph 148.
19 Commission notice on immunity from fines and reduction of fines in cartel cases (2002/C 45/03)
20 Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11)
10 of the information to be provided and to clarify the obligation of all leniency applicants to cooperate21.
1.1.4. Decentralization of leniency policy in the EU
The 2006 Leniency Notice concerns proceedings by the Commission, but there are also proceedings based on national competition law in individual Member States in cases where cartels do not affect trade between Member States and their activities are not subject to EU law. In a system of parallel competences, introduced by Regulation 1/200322, between the Commission and the National Competition Authorities, a leniency application made to one authority cannot be treated as a leniency application made to another authority. The Regulation 1/2003 established the network of European Competition Authorities (ECN). The ECN is composed by the Commission and the competition authorities of the member states.
Therefore, if a cartel involves multiple member states, cartel members must apply to more than one competition authority. The ECN attempts to harmonize key elements of the leniency policy, such as thresholds, conditions and precedents, and the extent to which certain applicants are excluded. The model leniency programme is not a legally binding document, and the system is decentralized.
However, In 2019, Directive 1/2019, commonly referred to as the "ECN+ Directive" or
"ECN+", was introduced23. This directive was to be implemented by member states by February 2021. Its main idea is to improve the decentralized competition enforcement system in the EU by harmonizing the enforcement systems of public authorities in the Member States and complementing the existing system of decentralized competition enforcement in the EU24. Chapter VI of ECN+ provides for the mandatory implementation of leniency programmes in member states. This is the first such legally binding document and until then, member states were not obliged to have national leniency programmes, but it was only encouraged. In
21 Wouter P.J. Wils, “Leniency in Antitrust Enforcement: Theory and Practice”
22 Council Regulation No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty
23 Directive 2019/1 of The European Parliament and of The Council of 11 December 2018 to empower the competition authorities of the Member States to be more effective enforcers and to ensure the proper functioning of the internal market
24 Potocnik-Manzouri, C, “The ECN+ Directive: An Example of Decentralised Cooperation to Enforce Competition Law” p. 992-995
11 addition, the Directive provides for minimum standards that countries must meet when introducing leniency programmes.
Prior to the introduction of this directive, most member states already had a leniency programme in their legal orders. The first country which introduced a leniency programme was Germany, already in 200025. In different countries leniency programmes before the introduction of the Directive, although they were introduced on the model of Leniency Notice, were different from each other and it was problematic for entrepreneurs to meet different requirements in different Member States. After the introduction of the Directive applying for leniency in different Member States and the Commission became much easier. Moreover, the Directive only introduces minimum standards, which is why some Member States provide for additional specific solutions, such as a leniency programme for individuals or leniency plus programme in Poland26.
1.2. Legal basis, scope and procedures for applying for leniency
1.2.1. Legal basis and scope of leniency programme in the EU
The leniency programme in European Union may be applied in the case of a violation of Article 101 of the Treaty of the Functioning of the European Union. Although, according to Regulation 1/2003, the National Competition Authorities may apply national provisions simultaneously. The legal basis for the programme itself is the Notice on immunity from fines and reduction of fines in cartel cases from 2006, amended in 2015. The programme was also introduced into primary EU law by Regulation 2015/134827 adding Article 4a to Regulation 773/200428, which provides for the possibility of applying for leniency.
The scope of the application in EU level is limited to breaches of competition law which constitute cartels. The Leniency Notice of 2006 defines cartels as agreements and/or concerted practices between two or more competitors aimed at coordinating their competitive
25 Badtke, F, Birnstiel, A, Steinvorth, T, “The Cartels and Leniency Review: Germany”
26 Dz.U.2021.0.275 t.j. - Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentów, art. 113d and 113h
27 Commission Regulation 2015/1348 of 3 August 2015 amending Regulation (EC) No 773/2004 relating to the conduct of proceedings by the Commission pursuant to Articles 81 and 82 of the EC Treaty
28 Commission Regulation No 773/2004 of 7 April 2004 relating to the conduct of proceedings by the Commission pursuant to Articles 81 and 82 of the EC Treaty
12 behaviour on the market and/or influencing the relevant parameters of competition through practices such as:
Fixing purchase or selling prices;
Fixing other trading conditions;
Allocating production or sales quotas;
Sharing markets, including through bid-rigging;
Restricting imports or exports;
Anti-competitive actions against other competitors.29
To the other horizontal or vertical restrictions of competition or abuse of a dominant position the leniency programme cannot be applied.
However in national legislation of some Member States the scope can be wider. For example in Austria the scope of leniency programme is applicable in circumstances involving vertical agreements since it is not limited to collusive agreements between two or more competitors on the same level of the production or distribution chain.30 Also in Poland the National Competition Authority (UOKIK) issued decisions where the leniency programme was applied to an undertaking involved in minimum resale price maintenance with its distributors31.
Additionally, European Union law does not provide for fines to be imposed on individuals for competition law infringements. This is not the case in some countries, where individuals can be sanctioned and have the right to apply for leniency to obtain immunity from fines. For example, in Poland, managers (persons in charge of an enterprise, inter alia, holding managerial positions or being members of the management body of an enterprise) who, at the time when the enterprise was a participant in a prohibited agreement, intentionally allowed by their action or omission the enterprise to infringe the prohibition of agreements restricting competition, are subject to a fine and may apply for an exemption from the fine through a leniency application, even if they are no longer associated with the infringer32. Similar to the
29 Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11) par. 1
30 Bundesrecht konsolidiert: Gesamte Rechtsvorschrift für Wettbewerbsgesetz, Fassung vom 25.04.2022 Section 11 para. 3 subpara. 1
31 Feliszewski, T, “The Polish Competition Authority changes its approach towards vertical agreements”
32 Dz.U.2021.0.275 t.j. - Ustawa z dnia 16 lutego 2007 r. o ochronie konkurencji i konsumentów, art. 113d
13 Netherlands, which also allows for individual fines, employees may seek for the same amount of fine reduction as the firm receives if the undertaking files a leniency application first.33.
1.2.2. Procedures and conditions to apply for leniency programme in the EU
According to Leniency Notice34 in order to apply for leniency the undertaking has to be the first to submit information and evidence which in the Commission's view will enable it to either:
a) carry out a targeted inspection in connection with the alleged cartel, which means providing a corporate statement, containing a detailed description of the alleged cartel arrangement and other important information mentioned in Section 9 of the Leniency Notice, or other evidence relating to the alleged cartel in possession of the applicant or available to it at the time of the submission, including in particular any evidence contemporaneous to the infringement
b) find an infringement of Article 101 TFUE in connection with the alleged cartel, which means submitting a corporate statement, containing information mentioned in previous point, together with presenting contemporaneous, incriminating evidence of the alleged cartel.35
For the other cartel members the leniency programme can provide a reduced fine if they submit evidence that represents a significant added value to the Commission's investigation.
In addition, all the applicants are required to follow certain behaviours consisting of genuine, full, continuous, and expeditious co-operation throughout the investigation. They should also end their involvement in the cartel, except when it is necessary to preserve the integrity of the Commission's investigation. Moreover, they cannot destroy, falsify, or conceal evidence of the alleged cartel, or disclose the fact of the immunity application36. Meeting these requirements is necessary in order to apply for leniency successfully.
The first leniency applicant who meets all of the above conditions is rewarded with full immunity from administrative penalties for participation in the cartel. This solution is
33 Beleidsregel van de Minister van Economische Zaken van 4 juli 2014, nr. WJZ/14112586, tot vermindering van geldboetes betreffende kartels art. 11
34 Leniency Notice Section 8 a) and b)
35 Leniency Notice Section 9 a) and b)
36 Leniency Notice Section 12 a), b) and c)
14 intended to increase distrust among cartel members and introduce competition among them as to who will apply first. The following reductions in penalties are provided for each subsequent applicant who provides significant added value:
- a reduction of 30-50% for the first applicant;
- a reduction of 20-30% to the second applicant;
- a reduction of up to 20% for any subsequent undertaking.37
A leniency application should be submitted to the Directorate General for Competition. There is no specific time limit within which the undertaking should make its application, but as the order in which the application is made determines the amount of the reduction of fine or the absolute waiver of the fine, it is advisable to make the application as soon as possible.
CHAPTER 2 - DISCUSSION OF PROBLEMS RELATED TO THE FUNCTIONING OF THE LENIENCY PROGRAMME.
2.1. The risk of private actions
2.1.1. Statistics on the impact of private actions on leniency applications
As I mentioned in previous chapter, the leniency program is crucial tool for detecting cartels.
Since introduction of 2006 Leniency Notice for most years 100% of investigations were initiated on the basis of information provided by cartel members through the leniency programme. The only two cases based on different sources than leniency application were decided under the settlement procedure.38
Looking at the data above, it is clear that the effective functioning of a leniency program is essential to successful public enforcement. However, it is important to keep in mind that in competition cases, the victims are usually consumers and other players at different levels of the supply chain, who also have the right to seek damages and obtain compensation for the
37 Leniency Notice Section 26
38 Ysewyn, J, Kahmann, S, “The decline and fall of the leniency programme in Europe Article l Concurrences N°
1-2018” p. 44-59
15 illegal actions of cartel members through private enforcement. Consequently, the European Union faces a tough challenge in balancing these two values. Since immunity or the reduction of a fine by applying for leniency does not in any way preclude legal action against companies in the form of private actions, undertakings involved in illegal agreements must be prepared for a potential class action even if they obtain immunity from administrative fines.
Over the years, the number of private damages cases related to cartel activity has been very low. Most Member States did not provide sufficient legal tools for effective private enforcement. The situation has changed dramatically in recent years, particularly since the introduction of the Damages Directive. In the 30 European countries covered, 299 cartel damages actions have been identified. Moreover, all damages actions, which were judged in big cases like a Trucks case39, are accounted for as only one case.40 In comparison, until December 2009 the total number of relevant judgements was 46. As you can see in the chart below, the number of private actions has increased significantly since 2014, when the Damages Directive was enacted.
(chart is from the article Cartel damages actions in Europe: How courts have assessed cartel overcharges by Jean-François Laborde)
39 Commission Decision of 27 September 2017 relating to a proceeding under Article 101 of the Treaty on the Functioning of the European Union and Article 53 of the EEA Agreement (Case AT.39824 – Trucks)
40 Laborde , J, “Cartel damages actions in Europe: How courts have assessed cartel overcharges (2021 ed.)”
16 Putting the above statistics together with the fact that number of leniency applications has been dropping significantly from 46 in 2014, to 32 in 2015, to 24 in 2016, and to 18 in 2017 and to 17 in 2018,41 a certain correlation can be seen. Moreover, the number of leniency applications has reduced by almost 50% over the last few years. According to a recent survey of 30 practitioners with extensive leniency experience, 83% of them said that they noticed a decrease in interest from their clients to apply for leniency in recent years. The increased exposure to private actions was the factor mentioned most frequently by 38% of the participants.42
2.1.2. Solutions introduced in Damages Directive
However, the legislators saw a threat to the leniency program when creating the Damages Directive and decided to introduce two solutions to keep applying for leniency attractive. The issues that raised concerns by the creators of the Directive were the right to full compensation from the leniency applicants by the victims and the possibility to access leniency statements in order to use them in proceedings against the applicants. In order to limit the full liability of the leniency applicants, the Damages Directive in art. 11(4) says in point (a) that the recipient is liable only for its direct or indirect purchasers or providers and in point (b) that it is liable to other injured parties only where full compensation cannot be obtained from the other undertakings that were involved in the same infringement of competition law. As a result, the leniency applicant is not liable for damages for private actions against direct or indirect producers and suppliers unless it is impossible to obtain compensation from the other cartel members. If it is not possible to obtain damages from the other cartel members, the leniency applicant is liable for damages in respect of all suppliers and producers with whom any cartel member has conducted business.
Regarding the possibility to access leniency statements in the proceedings, the Directive in art. 6(6) says that national courts cannot at any time order a party or a third party to disclose any of the following categories of evidence: (a) leniency statement; and (b) settlement submissions. Moreover, according to art. 7(1) the Member States shall ensure that evidence in
41 Global Competition Review, Rating Enforcement (2019) 2019
42 Survey prepared by Brussels Matters for its meeting: The European antitrust leniency calculus c. 2016: still worth it? (Brussels 16 June 2016), referred to in W. Wils’ article, Private enforcement of EU Antitrust Law and its relationship with Public Enforcement: Past, Present and Future, World Competition Law and Economics Review 2017
17 the categories listed in abovementioned article which is obtained by a natural or legal person solely through access to the file of a competition authority is either deemed to be inadmissible in actions for damages or is otherwise protected under the applicable national rules. Also, on March 14, 2017 the Court of Justice of the European Union issued an important judgment on the protection of leniency statements under the EU rules on leniency.43 According to this judgment, it is under no circumstance permitted to publish verbatim quotations of leniency statements. This ruling further deepens the confidentiality of documents related to the leniency application and certainly, in conjunction with the provisions of the Damages Directive, provides more favourable conditions for applicants to this program. The question of whether the above solutions regarding the liability of the applicant in private actions and the admissibility of leniency statements are sufficient to encourage cartel members to apply for leniency will be discussed in the following chapter.
2.2. Globalization and inconsistent application of leniency programmes in different countries
Since business transactions have an international dimension and are conducted across borders, Competition Law Enforcement is no longer limited to borders and a specific jurisdiction.
Globalization is making different markets more dynamic internationally, requiring a significant level of effective enforcement tools to remain competitive.44 To show the scale of change in the number of cross-border cases, it is worth mentioning that in 1990 only 23 jurisdictions had a competition law authority, while in 2013 already 127 jurisdictions had a competition law authority. Today, more than 150 jurisdictions enforce antitrust laws, including young and small agencies from developing countries.45 A problematic issue is the significant differences between the legal orders of these countries.
While in the European Union the ECN+ Directive has to some extent harmonized cartel public enforcement, other third countries, where many multinationals operate, have completely different rules, often inspired by U.S. law.
2.2.1. Relationship between leniency programs and criminal prosecution
43 Judgment of the Court (Grand Chamber) of 14 March 2017, C-162/15 P Evonik Degussa GmbH v European Commission
44 Enforcements of Antitrust Laws: Global Challenges “The Implications of Globalisation on Competition:
Challenges and Remedies” 10th Agon Working Paper August 2016, p.3
45 Ibid, p.3
18 One of the main problems with the globalization of cartel law and with an increasing number of cross-border cases is the relationship between leniency programs and criminal offenses in some jurisdictions. The United States provides criminal penalties for cartel activities available to both individuals and undertakings. Following the model of their legal system, by 2014 more than 30 other jurisdictions had adopted similar measures.46
Providing criminal sanctions for cartel-related violations may contribute significantly to making the leniency program less attractive. First, a significant number of jurisdictions providing for criminal sanctions exempt only the first applicant from those sanctions, while each subsequent applicant faces full criminal liability. Whereas often the value of the information provided by second, third and subsequent complainants may still be essential to the determination of a infringement.47 Additionally, criminalization may also prevent applicant companies from gathering evidence for their leniency application, as employees facing criminal prosecution may be less willing to cooperate with ongoing leniency investigations. If they are involved in a cartel, they may actually seek independent legal representation and refuse to cooperate with their employer at all.48 For cross-border cartels, the existence of jurisdictions with and without criminal sanctions may pose a threat to the effectiveness of leniency. Undertakings may not apply for leniency and may be reluctant to cooperate even in countries without criminal sanctions if they can expect criminal sanctions in at least some other jurisdictions.
2.2.2. Technical issues arising from globalization and inconsistent interpretation
Another reason why multi-jurisdictional applications diminish the effectiveness of leniency programs is the significant burden that companies must bear in connection with applying for leniency. In every country where the undertaking is applying for leniency it must provide retail authorities with evidence that may contribute to the investigation. This involves a significant amount of work and cost. It also involves time-consuming and costly translation of documents and the obligation of people in the highest positions to appear for interviews in
46 OECD Challenges and Co-Ordination of Leniency Programmes - Background Note by the Secretariat 5 June 2018
47 OECD Challenges and Co-Ordination of Leniency Programmes - Background Note by the Secretariat 5 June 2018
48 Stephan, A, Nikpay, A, “Leniency Theory and Complex Realities”, December 12, 2014
19 various countries. Additionally, applications in all jurisdictions may be jeopardized if any employee of any country destroys, falsifies, or conceals relevant information or evidence related to the alleged cartel. Therefore, an undertaking considering the possibility of applying for leniency must take into account not only the costs and obligations associated with applying in one country, but the overall potential costs of conducting such proceedings in all jurisdictions where the cartel operates.49
It is also problematic that a company may be deprived of immunity in some jurisdictions if other applicants prove that the reporting company was a cartel leader or if the applicant is unable to provide sufficient evidence to qualify for immunity in all jurisdictions. Sometimes, in some jurisdictions, it may be much more difficult for companies to provide adequate evidence because the company may simply not operate in a jurisdiction on the same scale as in others or the employees, knowing that they are violating the law, may deliberately destroy and conceal evidence. The applicant company must therefore secure the cooperation of current and former employees who participated in the cartel, despite its desire to terminate their contracts, whether for reputational reasons. It is therefore often recommended that undertakings do not dismiss rogue employees, at least for the duration of the investigation.50
A final issue that can significantly discourage potential applicants is the differences in requirements for requests for fine reduction or full immunity. Sometimes the requirements in different jurisdictions are mutually exclusive (conflicting requirements) and the applicant is unable to meet both of them. For example, some jurisdictions require that all cartel activity must be stopped before the application can be filed, while other authorities order companies to continue cartel activity until the applicant receives an order from the competition authority.
Additionally, different jurisdictions have different deadlines for completing particular actions, and with multi-jurisdictional proceedings, there is a chance that an applicant would not be able to meet the time demands of such a large number.51
49 Obersteiner, T, “International Antitrust Litigation: How to Manage Multijurisdictional Leniency Applications”, 2013
50 OECD Challenges and Co-Ordination of Leniency Programmes - Background Note by the Secretariat 5 June 2018
51 OECD Challenges and Co-Ordination of Leniency Programmes - Background Note by the Secretariat 5 June 2018
20 2.3. Other issues that potentially impede the proper functioning of the programme
In addition to the above reasons why applying for leniency may be less beneficial, there are many more uncertainties and other factors that contributes to this state of facts. Major uncertainties includes the uncertainty related to other forms of agreements and less classic forms of cartels and uncertainty around the scope of leniency notice with regard to ―secret‖
cartels. Moreover, the risk of spillover effects in terms of products and jurisdiction, the marker regime, introduced by Leniency Notice 2006 and high administrative hurdle also can contributes significantly to reduction of leniency applications.
2.3.1. Uncertainties related to other forms of cartels and the scope of Leniency Notice
As I mentioned in previous chapters, the definition of cartel can differ in different jurisdictions. This can lead to the situation that in one jurisdiction the anticompetitive agreement can be considered as cartel and in other not. As a result, the undertaking cannot be sure whether it should apply for leniency and disclose their actions to the competition authority or not. Additionally, as I said before, some jurisdictions extend the ability to apply for leniency for other types of agreements, such as vertical agreements. This uncertainty leads to a situation where a potential applicant decides not to apply for leniency for fear that in different jurisdictions its activities may not be covered by the application, in particular if it is not involved in a "typical" cartel.52
Another problematic uncertainty is the scope of the leniency notice and, in particular, the use of the phrase "secret" with respect to cartels. The Leniency Notice 2006 states: ―This notice sets out the framework for rewarding co-operation in the Commission investigation by undertakings which are or have been party to secret cartels affecting the Community‖.53 The Damages Directive also emphasized the secret character of the cartel.54 The leniency program is intended to limit the application of the leniency program to only those companies that participate in cartels that "would otherwise be difficult to detect." As a result, agreements between firms containing anti-competitive restrictions that have been made public will not be considered "secret". Leniency may therefore be appropriate for classic hardcore cartels. But in
52 Ysewyn, J, Kahmann, S, “The decline and fall of the leniency programme in Europe Article l Concurrences N°
1-2018” p. 44-59
53 2006 Leniency Notice, see para. 1
54 Damages Directive, see recital 38.
21 cases of information sharing, price signalling or "hub-and-spoke" agreements the situation is not clear and they have no guarantee that their application will be accepted and they may be subject to sanctions or private damages.55
2.3.2. The risk of spillover effect, marker regime and administrative burdens.
The risk of spillover effect is an important factor that companies have to take into account when applying for leniency. The spillover effect or the Domino effect is the phenomena when one cartel can be prosecuted for more than one infringement in relation to different products or in different jurisdictions. The case that illustrates the problem well is the Occupant Safety Systems case.56 In this case, the Commission found four different infringements in relation to the sales of different equipment to different suppliers. In effect, the immunity was granted to two companies based on different infringements. One undertaking applied first for leniency regarding three of the infringements and the other one was the first to blow the whistle in case of the fourth infringement. It resulted in a situation where both companies were partially responsible for the infringements related to cartel activities and none of them got full immunity. Moreover, both of them were threatened by private actions, so as a result, all cartel members lacked immunity and faced significant financial consequences. In addition, applying for leniency and obtaining immunity does not mean that undertakings are not exposed to risks from other authorities such as financial or stock exchange authorities or prosecutors in certain jurisdictions. This phenomenon is well illustrated by the YIRD case, in which, despite receiving full immunity in the EU and the US, UBS, or more precisely its Japanese sub- company, was prosecuted by the US Department of Justice for wire fraud and had to pay substantial fines to the UK Financial Services Authority and the US Trade Commission.57
The marker regime, introduced in Leniency Notice 2006, aims to increase legal certainty and predictability by ensuring that a potential immunity applicant can protect its place in the queue from other applicants, provided that the applicant provides the Commission with certain initial information, such as the names of the party to the alleged cartel, the products
55 Ysewyn, J, Kahmann, S, “The decline and fall of the leniency programme in Europe Article l Concurrences N°
56 Commission Decision of 22 November 2017 relating to proceedings under Article 101 of the Treaty on the Functioning of the European Union and Article 53 of the EEA Agreement (Case AT.39881 — Occupant Safety Systems supplied to Japanese Car Manufacturers)
57 Ysewyn, J, Kahmann, S, “The decline and fall of the leniency programme in Europe Article l Concurrences N°
1-2018” p. 44-59
22 concerned, within a certain time limit.58 For example, if Company A submits the preliminary information required under the marker regime first and then Company B submits all of the full information required for a leniency, then even though Company A has only submitted the preliminary information, by means of the marker regime it has " saved its place in the queue"
and once it has provided the full required evidence, it will be eligible to be considered a first applicant and receive full relief from penalty, while Company B, despite submitting the full documentation first, will be granted second applicant status and only receive a reduction in penalty. This solution, despite the intention to assist in the conduct of proceedings and facilitate the application for leniency, is criticized by the wide discretion of the Commission and it is argued that it absolutely does not fulfil its purpose.59 The main reasons why this system is criticized is that there is no guarantee that applicants will actually obtain the marker.
In addition, the time frame within which an applicant must perfect a designation is set by the Commission on a case-by-case basis. In fact, sometimes the period of time in which an applicant must perfect a marker may be very short.60
The last reason I identified why applying for leniency may be less attractive to cartel members is the high administrative burden involved. The applicant is required to cooperate with the commission by providing evidence and attending interviews. Companies must also invest a significant amount of time and money to make the relief or leniency process a success. This means that, in addition to potentially significant fees for outside counsel, equally significant amounts of management and employee time must be invested in investigating the behaviour.
Combined with the numerous uncertainties identified above, potential private actions, particularly in global cartel cases and multi-jurisdictional proceedings, the potential financial and time losses may significantly deter applicants from applying for leniency.
58 2006 Leniency Notice, see para. 14.
59 P. Verma and P. Billiet, “Why would cartel participants still refuse to blow the whistle under the current EC leniency policy?, Global Antitrust Review (2009) 1-20”, p. 2–6
60 S. Suurnäkki and M. L. Tierno Centella, “Commission adopts revised Leniency Notice to reward companies that report had-core cartels, Competition Policy Newsletter (Spring 2007), No. 1”, p. 10
23 CHAPTER 3 - THE POTENTIAL SOLUTIONS FOR MAKING LENIENCY
PROGRAMME MORE EFFECTIVE
3.1. Are the changes necessary?
Despite the significant drop in leniency applications, not everyone believes this is due to a malfunctioning program or an increased number of private actions for damages. Particularly on the Commission's side, one sees many statements suggesting that the program is working well and that the drop in applications is not due to defective functioning of the program. For example, Cecilio Madero, the Commission’s deputy director-general, stated that the fall in the applications can be a cyclical trend and the Commission is ―not very worried‖.61 In fact, different trends can be observed in different jurisdictions. Some show a significant decrease, while others remain stable or even increase. The competition authorities of the French, Brazilian, French, Brazilian, Japanese, and U.S. reported an increase in leniency applications, the Australian authority reported a steady level of applications and the Canadian authority reported a decrease in applications62. The Commission, to its credit, protects the confidentiality of leniency material, and in the Damages Directive it took steps to strengthen that protection. The Directive also increases the incentives for leniency applicants by limiting the claims of their co-offenders to share in the damages. Although, as I mentioned above, it does not do so in the most effective way.
Additionally, Margrethe Vestager in her speech at the Italian Antitrust Association Annual Conference63 acknowledged that there has been a decline in leniency applications probably due to the introduction of the Damages Directive and the high cost of pursuing leniency cases, especially in times of far-reaching globalization and an increasing number of jurisdictions introducing leniency programs. Also she said that the commission has begun regular discussions with businesses to get their views on how the leniency program is working, and is talking to other competition authorities to see what we they learn from their experiences with leniency in their own territories. However, she provided a slightly different perspective on dealing with this situation. First, she pointed out the importance of a Compliance Programs
61 Gunigant, P, “Global Competition Review article Leniency applications are “not going up”,20 February 2018
62 Competition Law Insight June 2018 Volume 17 Issue 6
63 Speech by EVP M. Vestager at the Italian Antitrust Association Annual Conference - "A new era of cartel enforcement”
24 that could, for example, make employees better at recognizing cartels and more willing to report their existence. To this end, the Commission, has introduced an electronic tool through which whistleblowers can report to it and the Commission can ask them for more information without exposing them. The tool has reportedly helped uncover new cartels and strengthen existing cases. It currently handles about a hundred relevant messages per year.
The new approach outlined by the European Competition Commissioner is also a partial shift away from reliance on inside information to "open source intelligence." Specialized investigators and intelligence analysts can learn much from public information and from conversations with other law enforcement officials. Data scientists, on the other hand, are skilled at finding suspicious patterns in very large amounts of data. For this reason, the Commission created an intelligence unit in 2016 that uses these skills to develop more modern and effective strategies for detecting and prosecuting cartels. Since then, it has helped investigate more than 30 cartel and antitrust cases. In the coming years, this unit will play an increasingly important role in our work, according to Margrethe Vestager.
She also pointed out that market distortions caused by cartel activity are easily observable and detectable by market analysis. Therefore, the Commission is increasingly talking to businesses about what they can do if they suspect a cartel. In addition, the Commission will also continue to share confidential information with competition authorities and other enforcement authorities, which has already played an important role in uncovering cartels.
From this speech it can be seen that the Commission has some ideas on how to make cartel detection more effective, but it does not present any particular ideas on how to improve the functioning of the leniency program itself; on the contrary, it sounds as if the Commission has partially given up in its efforts to fix it and is looking for other ways to deal with cartel detection. The above speech to some extent contradicts what Cecilio Madero said about the Commission not being concerned about the state of the leniency program and the cyclical change in leniency application trends. A step away from leniency can be fatal because, as I have mentioned many times before, the function of cartel detection is not the only function of the program. A key function is also the creation of distrust within the cartels and the creation of the so-called Prisoner's Dilemma.
25 3.2. Suggestions on how to solve the private damages problem
3.2.1. Limitation of leniency applicant's liability
The problems I mentioned above are well-known to the doctrine and are often raised in conferences and debates on the effectiveness of the leniency program. As I mentioned in the section on risk of the private actions, the Damages Directive provides for a limitation of the applicant's liability for its direct or indirect purchasers or providers. This is certainly a convenience for a leniency applicant, but it may not be sufficient. This solution assumes that cartel members have their own separate direct or indirect purchasers or providers, whereas in many cases it is more complex and in effect, the providers or purchasers may do business with all or several cartel members, even in small quantities. In such a case, in effect, the leniency applicant will be responsible for infringements towards most or even all of the victims.
Additionally, in this case, leniency applicants are usually the only parties who do not appeal the Commission's infringement decision. Consequently, the applicant will be subject to the infringement conditions set forth in the Commission's original decision and other parties at that time have the opportunity to have various aspects of sanctions reduced or invalidated, which can have a domino effect on the level of damages claims for which they are ultimately responsible.64
Recently, Andreas Mundt, the president of the German Federal Cartel Authority and head of the International Competition Network, suggested to limit the civil liability of leniency applicants by exempting them from follow-on damages actions to a large part or even altogether.65 Although, in order to benefit from the immunity for public and also private enforcement, you have to be the first applicant. A full exemption from private damages payments may certainly be a rather controversial measure since, according to European legal tradition, damages are to be paid for in civil law and making an exception only for competition law seems to be unreasonable. As the ECJ has repeatedly stated the full compensation for victims of cartels is a fundamental principle of private enforcement of competition law in the EU.66 However, in this case, it should be noted that such a solution is
64 Ysewyn, J, Kahmann, S, “The decline and fall of the leniency programme in Europe Article l Concurrences N°
1-2018” p. 44-59
65 Aranze, J, Mundt, T, “immunity from damages for leniency applicants” 10 September 2021
66 Judgement of the Court, 5 June 2014 In Case C‑557/12 (KONE case) or Judgement of the Court, 14 March 2019 In Case C‑724/17 (Skanska Case)
26 intended to ensure the effective detection of cartels and the proper functioning of the market, which can be considered to be the public interest justifying the introduction of such a solution.
Another solution, a bit less controversial, which in my opinion seems reasonable, would be to release the leniency applicant from joint and several liability in favour of subsidiary liability.
In this case, the leniency applicant would only be liable for damages caused by the cartel if other cartel members were insolvent, which does not happen very often in practice. Such a solution was introduced in Hungary in the form of an amendment in 2005 to the 1996 Act on the Prohibition of Unfair and Restrictive Market Practices (HCA). This amendment was intended to protect entities seeking leniency to ensure that they would not be worse off than entities not seeking leniency in the event of subsequent lawsuits. Under Section 88.D of the HCA, a leniency applicant may only be sued for damages if the plaintiff has been unsuccessful in obtaining full compensation from the other defendants.67 However, these provisions were changed due to the implementation of the Damages Directive, which contradicted it.
Despite this, in my opinion, such a solution is most appropriate. First, as I mentioned above, today's limitation of liability only for its direct or indirect purchasers or providers is not a sufficient solution due to the fact that many larger global cartels covering various product markets often do business with at least most, or even all, of the purchasers or providers affected by the cartel. Second, such a solution would not violate the right to compensation of those harmed by the cartel because it would not lead to a situation where no entity is responsible for the cartel violations, as would be the case with the solution suggested by Andreas Mundt.
3.2.2 Introduction of Fair Funds institution
The other interesting solution, suggested by Angelika S. Murer in her paper68, is introducing the system of Fair Funds, based on the US legal framework. The concept of Fair Funds was introduced in the US in Sec 308(a) of the Sarbanes-Oxley Act of 2002.69 It consisted of
67 Relationship Between Public And Private Antitrust Enforcement, Directorate For Financial And Enterprise Affairs Competition Committee
68 Murer, A.S, “A Solution To Europe’s Leniency Problem: Combining Private Enforcement Leniency Exemptions With Fair Funds” February 2022
69 Sarbanes-Oxley Act of 2002
27 various financial penalties for violations of the law, such as fraud, being distributed to the affected investors, rather than being paid into the U.S. Treasury as before, so they go directly to the victims.
Introducing such a concept into EU competition law would mean that fines collected by the Commission or national competition authorities would be distributed to natural or legal persons who have suffered harm as a result of a competition law violation and not go to the EU budget or the Member States. They are several researches that show the effectiveness of these Fair Funds.70 The average Fair Fund disbursement is basically the same size as the average class action disbursement. In addition, Fair Funds appear to more effectively compensate investors for various types of misconduct than private lawsuits, especially in cases where a private lawsuit is unavailable or impractical.
To use the Fair Funds in cartel cases, we should combine it with subsidiary liability. The applicant should only be liable for damages if other cartel members would not be able to pay.
At the same time, a parallel distribution of Fair Funds from collected sanctions to injured parties could compensate the loss of the applicant in case other cartel members were insolvent. In addition, the distribution of the Fair Funds would be parallel to already possible further damages actions from which the leniency applicant would be exempted or whose liability would be subsidiary.71 In this way, the applicant will not be afraid of private actions which will result in better functioning of the leniency program, detection of cartels and creating distrust among members, and victims of cartel actions will be properly compensated and there will be no risk of insolvency.
3.3. Suggestions on how to solve the globalization and inconsistent interpretation problem
Applying for leniency in different jurisdictions in times of far-reaching globalization is certainly very cumbersome for companies seeking immunity. For the reasons I outlined in the section on the problem of globalization and the inconsistent application of the leniency program, many undertakings choose not to disclose their cartel activity. In the European
70 Velikonja, U, “Public Compensation for Private Harm: Evidence from the SEC's Fair Fund Distributions”
71 Murer, A.S, “A Solution To Europe’s Leniency Problem: Combining Private Enforcement Leniency Exemptions With Fair Funds” February 2022