German legislator is going to introduce EU liability – debate about new German Competition Act is gaining momentum

On 28 September 2016, the German federal cabinet has adopted a sanction policy-oriented draft legislation in relation to the 9th Amendment to the Act against Restraints of Competition (the "ARC"), submitted by the Federal Ministry of Economics that, among others, provides for a tightening of liability for companies based on the European model. Accordingly, parent companies shall be liable for anti-competitive market behavior of their subsidiaries even though they have not been directly involved in the infringements or have not infringed their supervisory duties (sec. 81 para. 3a ARC-Draft). In addition, the intended extension of company liability also covers the area of universal succession (sec. 81 para. 3b ARC-Draft) as well as economic succession (sec. 81 para. 3c ARC-Draft), in order to close loopholes, since so far companies are able to escape liability by clever internal restructurings or transfers of assets.

The Federal Cartel Office had already praised a previous version of the draft legislation because the planned changes would help to close regulatory gaps. However, critical voices are becoming louder as far as the planned extension of company liability is concerned. Also the German Bar Association (the "GBA") has expressed its views on 19 September 2016. It highlighted in particular the potential for conflict between a strict corporate group liability (i.e. irrespective of any fault) by introducing a concept of “undertaking” based on the European model, i.e. regardless of the legal entity, on the one hand, and proven cornerstones of German corporate and group law, especially the so-called separation principle according to which group companies are separate legal entities, on the other hand.

1. Introduction of a "factual liability" (comparable with the concept of premises liability)?

In the future, cartel fines shall also be imposed on companies as far as they have exercised a controlling influence on the legal person or associations of individuals, whose managing person has infringed competition law (sec. 81 para. 3a ARC-Draft). In other words: The parent company shall be held liable for infringements committed by its subsidiary. This reminds of the European concept of “single economic entity”, according to which affiliated companies are jointly and severally liable regardless of a direct or active participation of the parent company in the infringement of competition rules.

The introduction of such a "company focused sanction", as it is called in the legislative draft, raises objections among German scholars, notably in constitutional terms (e.g. German strict "principle of fault" which is comparable with the general principle of mens rea). Insofar, for the justification of a co-liability, an actual influence on the competition process by the person being held liable – i.e. an anti-competitive behavior of the parent company of the real delinquent – plays no role. Therefore, from a corporate legal point of view separate legal entities would be liable for violations of competition law that have been committed by other legal entities, i.e. without contributing any own illegal (anti-competitive) action, provided – like on EU level – that several companies are not viewed as "one entity" that has infringed competition law.

Critical voices like the GBA speak of a breach with the principle of separation according to German corporate law and, thus, with the German corporate law system as such. According to the GBA there is no need for such strict corporate liability at all, since neither the effet utile principle, profoundly embedded in EU law, nor the implementation of the directive 2014/104/EU, which even avoids a definition for the concept of undertaking in its article 2, dictates such an extension of liability for a fine.

2. Softer liability standards as a practical alternative?

Alternatively, the GBA suggests a co-liability of the parent company based on an infringement of organizational duties in a group company. The cause of liability may be, at the most, an omission of sufficient preventive measures against future competition law violations (establishment of a compliance system incl. actual supervision). Also, the burden of proof could be shifted onto the parent company. According to the current legal situation a parent company can already be held liable if it participates or contributes in the competition law violation committed by its subsidiary or if its management body violates its supervisory duties vis-à-vis the subsidiary, sec. 130 Act on Regulatory Offences. Hence, currently not the legal interrelationship is crucial, but the actual or possible influence being exercised.

In case of reliance on an organizational fault, the accusation towards the parent company lies in an (intentionally or negligently) omission, namely that preventive measures to disclose and prevent anti-competitive behavior within the company have not been implemented.

Compliance efforts – even with the highest standards – cannot protect companies from being accused of competition law infringements. Such measures, however, virtually enhance the possibility to prevent antitrust violations. Furthermore, recent jurisprudence shows that the implementation of a genuine compliance system is certainly of potential relevance in terms of parental liability (e.g. in case of contentious internal redress scenarios between former group companies which have been fined jointly and severally).

In addition, the GBA suggests a supplementary co-liability of the parent company by means of skimming off excess profits, if:

(i) the actual infringer is insolvent, and

(ii) such subsidiary co-liability of the superior company is limited to the amount of profit that it has achieved since the time of the infringing act (including hidden distributed profits).

Taking responsibility for liabilities of illiquid, fined subsidiaries by the parent company corresponds with the idea of compensation for the damage caused. Such approach also takes corporate law principles into account. Moreover, the Federal Cartel Office has taken the view in the past that a parent company has to take at least financial responsibility for the wrongful behavior of its subsidiary. Nevertheless, in practice this concept might not always be easy to implement, in particular because it is often hard to measure the exact amount of the unlawfully achieved profits due to the variety of influencing factors on the pricing.

3. Practical significance

The introduction of such wide-ranging, EU law inspired liability rules into German competition law, as it is planned according to the recently published legislative draft, would increase the risks of liability within a company group immensely. A great number of legal questions has not been answered yet, for instance if the legislator intends a full harmonization with the concept of EU parental liability and how related questions should be answered, such as regards the interpretation of “decisive influence”.

In any case, extensive and effective compliance measures for companies and a corresponding, legally sound advice are more important than ever. At the same time, corporate transactions will increasingly demand for considering liability assumptions and liability limitations (warranties and indemnifications), also in view of the planned regime on the succession of liability.

The legislative draft to the 9th Amendment of the ARC is available here (in German only).