European Union General Court Annuls Cartel Fine Based On European Commission’s Insufficient Reasoning
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  • European Union General Court Annuls Cartel Fine Based On European Commission’s Insufficient Reasoning
    On September 24, 2019, the EU General Court annulled the cartel fine the European Commission had imposed on a financial institution for alleged anticompetitive conduct in the Euro interest rate derivatives market based on the Commission’s failure to adequately explain its reasoning in determining the amount of the fine.  HSBC Holdings plc et al v. European Commission, Judgment in Case T-105-17.  At the same time, the Court largely upheld the Commission’s decision on the underlying infringement and provided additional clarity on other key aspects of cartel rules, namely, ‘by object’ infringements, the evidentiary requirements to establish a single and continuous infringement (SCI), and the Commission’s obligation to uphold a non-settling party’s presumption of innocence in hybrid settlement procedures.


    In December 2013, the Commission fined four different banks a total of EUR 1.49 billion in a cartel settlement decision for participating in an alleged cartel related to Euro interest rate derivatives (“EIRDs”), based on traders’ discussions of their banks’ submissions for the calculation of the EURIBOR rate, as well as discussions related to their trading and pricing strategies.  Three other banks, however, had chosen to withdraw from the settlement procedure and to contest the matter.  They received a Statement of Objections in March 2014, and were subject to an infringement decision based on the alleged EIRD conduct in December 2016.

    Fine Calculations: The Duty To Give Sufficient Reasons

    As part of its appeal, the financial institution argued that the Commission failed to provide an adequate statement of reasons for its fine calculation. Because the EIRDs do not generate sales in the usual sense of the term, the Commission had calculated the fine amount using a proxy for the traditional value of sales method used in calculating fines.  To calculate the proxy, the Commission determined the cash flows each bank received from their portfolio of EIRDs. Then, to account for the specifics of the EIRD market, including the netting inherent in this market (i.e., banks both pay and receive interest based on EUROLIBOR), the Commission applied a uniform percentage reduction factor to the cash flows to determine the sales proxy.

    The Court found no fault with the use of cash flows as a proxy, but faulted the Commission’s approach to the percentage reduction factor.  The Court began by restating the general position that the Commission is obliged to provide reasons for the amount of the fine and its calculation method, including describing the factors that enabled it to determine the gravity and duration of the infringement and explaining the weighting and assessment of the factors considered.  The Court emphasized that compliance with this obligation must be assessed by reference to the specific circumstances of the case, and identified two circumstances in which Commission’s decision was found wanting:  First, the Court noted that, despite recognizing the unusual nature of EIRDs and how they do not generate sales in the usual sense, the Commission had nonetheless chosen to apply the 2006 Fine Guidelines rather than depart from the Guidelines methodology in accordance with paragraph 37 of the Guidelines.  As a result, the Court found that “it was essential that the statement of reasons in the contested decision should enable the applicants to verify whether the proxy chosen by the Commission may be vitiated by an error enabling its validity to be challenged and the Court to exercise its jurisdiction to review legality.”  Second, the large value of the cash flow used by the Commission as the basis for its fine calculation meant that the reduction factor played an essential role in determining the ultimate fine amount. As a result, the Commission was required to provide reasoning that enables defendant to understand how the Commission arrived at the specific percentage reduction factor.

    In assessing the second point in particular, the Court found that the Commission had failed to provide sufficient reasons; it dedicated only five recitals to the issue, concluding that the percentage reduction factor had to be more than 90% (as the fine imposed would otherwise be overdeterrent). By merely stating that it had performed an estimation of potential reduction factors without providing the specific values used in such estimation, the Commission did not “provide the applicants with an explanation of the reasons why the reduction factor was set at 98.849% rather than at a higher level,” nor did it provide the Court with the ability to conduct an in-depth review.  Additional explanations the Commission provided to the Court after the hearing were also irrelevant, as they did not “supplement a statement of reasons which is already sufficient in itself.”

    The Court therefore annulled the fine against the financial institution in full.  This ruling is consistent with the approach in the November 2017 ICAP judgment, which was upheld by the European Court of Justice in July 2019.  Notably, the ICAP judgment focused on the Commission’s duty to provide an adequate statement of reasons for the fine when it departs from the general calculation procedure, while the Court’s new judgment imposes a similarly high obligation of explicit reasoning when the Commission uses the standard fining calculation procedure.

     ‘By Object’ Infringements

    On the issue of the infringement finding itself, the Court upheld the Commission’s finding of a ‘by object’ infringement as to the majority of defendant’s alleged conduct, including both the alleged manipulation of the EURIBOR rate and certain exchanges of information.  In respect of the information exchanges in particular, the Court found that the Commission had conducted the necessary analysis by assessing factors such as the sensitivity of the information and its lack of public availability, and the impact of the exchanges on transparency in the EIRD market.  For some instances of information exchange, however, the Court rejected the Commission’s finding of a ‘by object’ infringement.  In the Court’s view, the Commission had failed to establish that certain of the discussions on trading positions that were not otherwise connected to the setting of the EURIBOR rate amounted to ‘by object’ infringements.  Specifically, the Court found in one instance that the Commission had not established the trading position discussion in question “gave the traders an informational advantage that may have allowed them to adjust their trading strategies as a result.”  In the second instance, the information shared was deemed to be a “simple observation which any market observer could make,” meaning no conclusion of a ‘by object’ infringement could be drawn.

    Establishing an SCI

    On the issue of whether the Commission properly found a single and continuous infringement (“SCI”), the Court dismissed the Commission’s findings of the financial institution’s awareness as to conduct in which it did not directly participate.  The Court began by reiterating the requirements for proving an SCI:  that the conduct forms part of an overall plan with a single objective, that the relevant undertaking intends to contribute to such common objective, and that the undertaking is aware of or could reasonably have foreseen the offending conduct planned or put into effect by other parties in pursuit of such objective.  In the Court’s view, the central tenet of the overall plan here was the operation of the cartel by the same group of persons, but no trader from defendant was included in this group and “only very fragmented information” had been provided to defendant as to the infringing conduct.  Thus, the Court found, the Commission could not find that the traders of defendant should have been aware that “a stable group of traders was participating in other conduct restricting competition on the EIRD market.”   As a result, the financial institution defendant could only be held liable for the conduct in which it directly participated (as well as the one other instance in which direct evidence of its awareness had been established by the Commission).

    Upholding Procedural Rights in Hybrid Settlements 

    Finally, the Court rejected the financial institution’s contention that, as a non-settling party in a hybrid settlement case, its procedural rights had been breached because the settlement decision against the settling banks prior to the financial institution’s infringement allegedly prejudged its liability and “irremediably impaired [its] right to be heard.”  In contrast to the lengthy discussion of procedural fairness in hybrid settlements in its earlier ICAP decision, the Court addressed the issue quickly here, explaining the procedural posture, confirming the right of a presumption of innocence, and swiftly concluding that, since the Commission had already validly established the financial institution’s participation in the infringement (aside from in the instances annulled by the GC in its analysis of the financial institution’s ‘by object’ and SCI pleas discussed above), “there is no reason to assume that, if the settlement decision had not been adopted before the contested decision, the content of the latter would have been different.”   As a result, there was no basis to annul the decision on this issue.

    Key Takeaways

    The General Court’s decision serves as a reminder for the Commission to provide sufficient reasoning when explaining fine calculations in its decisions, not merely when it chooses to rely on paragraph 37 of the 2006 Fine Guidelines, but whenever the circumstances demand such detailed reasoning. The Court’s annulment of the decision against the financial institution does not, however, prevent the Commission from attempting to address its faults and issuing a re-adopted decision, an approach it took in the Envelopes cartel recently. 

    Regarding ‘by object’ infringements, the Court reaffirmed the importance of conducting a detailed analysis of the alleged conduct and its context in order to establish such infringements, particularly in the context of information exchanges.  This ties in with Advocate General Bobek’s recent opinion in a preliminary ruling related to the Interchange Fee case, which confirmed the two-step procedure for finding a ‘by object’ infringement:  first, identifying whether an agreement is inherently harmful, and second, verifying such finding by conducting the necessary contextual analysis.  The judgment here also reaffirms the generally high evidentiary standard for the Commission to establish an SCI, and in particular, a party’s requisite awareness of the overall plan of the infringement.

    By contrast, the judgment did not provide substantial additional guidance on the procedural issues presented by hybrid settlements.   Further guidance on this issue may therefore be something to look for in other pending appeals by non-settling parties in hybrid cases, including the other appeals pending from the same EIRD decision.