Invest in fines for data in Schengen area

Europe’s IT independency requires a continuous tour de force for the financing of the infrastructure. The enormous sum of fines stemming from competition violations could be used for funding and start-up financing.

Without an efficient competition policy the domestic market can never fully unfold its potential. This is why in the European Union – as today’s biggest economic- and trade territory with half billion consumers and 20 million companies - the continuous optimisation of fair competition rules and the step-by-step realisation of the domestic market have gone hand in hand right from the start.

Cartels – the worst form of competition violation

Cartelisation, the collaboration of companies in shaping the market, in contrast to research collaborations and to today’s widespread open innovation approaches, doesn’t aim to generate always better and cheaper products and services in a free competition, but exactly the opposite: To largely expose the competition through illegal and hidden price agreements. In such cases there is no motivation for the companies involved to consider the customers’ perspective concerning quality and product diversity in their businesses.

The most cartels take place covertly, either through direct agreements between market participants or through their professional associations, so that they are extremely difficult to detect. Cartels violate EU competition laws and the Commission can impose heavy financial penalties on the involved companies. By introducing a leniency application similar to the American example, the Commission itself encourages the cartel-involved companies to the disclosure of internal cartel-information that would hold out the prospect of attenuating circumstances (leniency) as the reduction or the complete remittal of the otherwise imposed penalties.

Tough measures will be taken against cartels especially because they are the most shameless form of violating the competition law. In the antitrust-legislation attention is being paid in which form has the law been violated, if, for example, horizontal agreements between independent companies, i.e. between competitors on the same level of the supply chain, or vertical agreements between companies on different stages of the production- and supply chain (for example between producer and merchandiser firm) and in which degree they undermine the functionality of markets, for example through price determination and allocation of customers.

Abuse of a dominant market position

A dominant market position is not anti-competitive in itself. An abuse occurs when a company misuses its dominant position in order to eliminate other competitors on the market. Law violations in this field involve package deals in the case of selling software products (for example operation systems) with other software accessories (for example browser systems), fixing dumping prices at a drop level (predation), the refusal to supply a know-how that is essential for a competition in a secondary market (for example printer driver) or the clearance of excessively high prices.

During investigations if an abuse of a dominant market position occurred the EU Commission evaluates firstly the market position of the company on the product market, as well as on the geographic markets. At market shares under 40 percent it is unlikely to have a dominant market position. But for the final assessment several other factors will also be considered, as for example the ease of entry to a market for competitors, the existence of market participants with similar purchasing power, the total strength of the suspected company and its resources, as well as its presence on different levels of the supply chain (vertical integration). The EU Commission can impose a high financial penalty if an abuse of a dominant market position gets proven.

Company mergers and state aids

In the global economy businesses merge with the purpose of developing products more efficiently or reducing the production and distribution costs by fully exploiting the synergy effects or by combining mutually supportive strengths. Such mergers result in an intensified competition in the respective markets. In cases of a merger, competition authorities verify the market balance remains unaffected, thus trying to avoid the distortion of the competition through monopolistic constellations.

The European Commission checks every merger arising from a company with global and/or European net annual revenue above a particular level. In this process only those sales revenues will be considered that are object of the concentration. Subjects of examination are cases where the seller company represents an asset of more than 5 billion Euros respectively the aggregated turnover of each of at least two involved companies is more than 250 million Euros. Mergers under these threshold values can be examined by national competition authorities.

The fourth area that the European Commission monitors at the shaping of fair trade markets are national aids. When economic sectors get supported by public authorities, unfair advantages over comparable industries in other EU member states can arise that result in distortions of competition. National aids can therefore only granted when they really serve the general public interest, and do not have a negative effect on the trade between the member states.

In order to simplify this control function a new “Legal framework for national aids for services of general economic interest” (SGEI) was adopted in 2011 and from 31. January 2012 put into force. In May 2012 along with the modernisation of the EU state aid rules (State Aid Modernisation = SAM) the Commission introduced an even stricter reform agenda. The SGEI is part of the European model of the social market economy and supports public authorities in the development of more intelligent, more effective and more efficient services in areas such as energy, traffic, telecommunication and postal services. Well-designed aids directed to a proven market failure should be facilitated. Overall, the rules on national aid are about mastering a double challenge: on the one hand, national aids should serve growth promotion purposes and have an incentive effect on private investments; on the other hand they should, based on the given budgetary constraints, ensure the long-term sustainability of public finances and protect the domestic market at the highest possible degree.

Objectives and procedure concerning fines

Regarding competition violations, the European Commission uses a preventive approach. Ultimately, fines too have a preventive character – they should punish and discourage. In order to meet this objective, the amount of a fine imposed on a cartel should reflect the duration of the cartel. The weight of a fine is based on a specific percentage of the yearly turnover that the company generated with a specific product while violating the competition law. Basically an amount up to 30% of the relevant turnover can be defined. The level of the fine depends ultimately on the gravity of the infringement that is determined by several factors, among others the type of infringement (for example the abuse of a dominant market position, price agreement, market sharing) as well as the geographical extent of a cartel. In case of cartels the percentage is within a range of 15 – 20 percent.

A second major criterion when determining the amount of the fine is the duration of the infringement. The amount determined on the basis of the value of sales will be multiplied by the number of years and months (0 - 6 months = ½ year, 7 – 12 months = 1 year) during which the company was involved in the infringement.

If aggravating circumstances are present (for example in cases of repeat offenders) the amount of the fine can be increased, by attenuating circumstances, on the other hand, it can be reduced. As additional discouragement, fines in case of cartels will be increased to a one-off amount of 15 to 20 percent of the yearly turnover. This is of great effect on cartels of short duration.

Many key players at the enforcement process for financial penalties are involved in the EU Commission as well as in external jurisdiction. The central authority is the Directorate General for Competition that is organised in directorates (mergers, antitrust, state aid) and units (tools of competition and sectorial breakdown). The examination of a case will be allocated to the relevant unit that, as case team, serves as junction between the Directorate General for Competition and the involved parties.

During the process of the internal checks and balances, especially at very complex cases, the chief economist, directly responsible for the general director, stands by the side of the case team as a source of advice. He assists at the European Court of Human Rights too in pending cases. Internally the Directorate General will conduct a peer review that should allow for a fresh pair of eyes on certain aspects of the assessment through the case team. The hearing officers work independently from the Directorate General and are directly subordinated to the commission member (Joaquín Almunia). They make sure that the procedural rules are respected, guarantee the quality of the decision-making and ensure the procedural rights of the parties.

Moreover, internally within the Commission the legal services and other associated services, as well as an Advisory Committee are involved in the decision-making. Decisions about the application of Article 101 and 102 of the contract about the functioning of the European Union (TFUE = Traité sur le fonctionnement de l’Union européene) will be made by The Collage of Commissioners upon recommendation of the commissioner responsible for competition policy. In external checks and balances of the judicial review the European courts and the European Court of Justice are integrated as of second instance.

Famous cases of penalties

2008 the EU Commission imposed a gigantic fine related to the market sharing cartel of European car glass producers. The Asahi, Pilkington, Saint-Gobain and Soliver companies have been systematically deceiving the automobile industry and the consumers for five years between 1998 and 2003 on a market with a 2 billion Euros yearly. The amount of 1.3 billion Euros for a whole cartel and 880 million Euros against one company (against Saint-Gobain – 60 percent increase because of repeated infringements) was the highest fine imposed ever. During the process, Asahi provided additional information about the cartel so that its fine has been reduced by 50 percent, based on the Leniency Notice.

In 2012 the four years record was broken when a picture tubes cartel, functioning for ten years (1996 – 2006) got fined. A total fine of 1.47 billion Euros has been imposed against seven picture tube producers in two cartel cases. The involved companies were Philips, Samsung, LG Electronics, Panasonic, Toshiba, Chunghwa and MTPD.

In 2008 the EU Commission punished Microsoft with a fine of 860 million Euros. The reason: Microsoft has been charging excessively high prices from its competitors for years for the provision of technical information about its operation system. Last year Microsoft has been fined again with more than a half billion Euros. Reason: between May 2011 and July 2012 it offered in its operation system Windows 7 only its own browser, Internet Explorer, and not a selection window with competitor offers like Mozilla Firefox, Google Chrome or Apple Safari. This restriction affected 15 million Windows users in Europe. With this sentence the EU Commission gave a fine for the first time for violation of an obligation, which, however, was way under the highest possible rate of 10 percent of the total annual turnover, because Microsoft collaborated with the antitrust authorities from Brussels.

In 2013 the EU Commission took around 1.5 billion Euros of fines for antitrust or market violations. At the end of the year a record fine of 1.7 billion Euros were imposed on eight international banks, the Deutsche Bank among others, because they manipulated important reference rates. The penalties against the banks will be booked this year.

Because Germany comes up with around 20 percent of the EU budget, also the percent rates of the incoming penalties will be returned to Germany. Thus, 2013 flow around 310 million Euros on these ground back into the German budget. In 2012 Germany’s contribution to the EU budget has been reduced from 3.3 billion Euros to 683 million Euros through fines receipts.

On the other hand, EU Commissioner Joaquín Almunia wants to resolve the year-long legal dispute with Google concerning the discrimination of search ad competitors in light of recent admissions by the company without setting fines.

Examined focus markets

According to its annual report, the Directorate General for Competition focused 2012 when monitoring compliance with the rules on competition especially on the finance sector (for example the capitalisation of the Spanish bank sector in accordance with the state aid rules), on the network industries (the opening of an antitrust procedures against Gazprom, the sanctioning of an agreement between the Telefónica und Portugal Telecom providers because of geographical division of the Iberian market), on the digital economy (the process against Samsung and Motorola because of violation of their Standard Essential Patents as well as for restoration of competition on the e-book market) and the pharmaceutical industry (the publication of findings and reclamations regarding anti-competitive behaviour and arrangements regarding cheaper, generic medicines).

Further milestones in the European competition law

In June last year the European Commission after preceding policy initiatives (Green Paper 2005 and White Paper 2008) presented a “proposal for a Directive of the European Parliament and of the Council on certain legal regulations of damage compensations, set out under national law, for infringements against competition law provisions of the member states and of the European Union”. Thus, the EU Commission targets the private enforcement of competition law of Article 101 and 102. Based on the enshrined prohibitions anyone can require compensation for the damages suffered if there is a substantial link between the damages and a violation of the EU competition law. The wronged party should be able to require compensation for the actual financial loss (“damnum emergens”), a compensation for the lost profit (“lucrum cessans”), as well as the payment of interest.

However, it’s neither the EU Commission’s nor the national competition authorities’ responsibility to grant the compensation, but a matter of civil law and civil law proceedings in national courts. With this proposal the Commission targets to optimise the interaction between private and official enforcement of the EU competition law as well as to guarantee that the victims of infringements of the EU competition law get full damage compensation. In order to quantify the damages of antitrust violations the Commission published a “practical guide” that’s meant to give valuable help in cases of difficult assessment of the damage extent.

According to the Commission, the competition authorities’ decisions should have complete validity in civil procedures (better evidence of the occurred damages) and there must be clear regulations regarding the time limitations for the submission of compensation claims. The directive should also operate with a “(by the causer) rebuttable presumption”, whereupon in 90 percent of all cartel cases the customers get damaged by higher prices, for the payment of which full compensation should be guaranteed.

In December 2013 the EU Commission targeted a political agreement over a proposal for a “regulation for criminal sanctions for market abuse” (IP/11/1218). To this bitter Christmas present for law criminals in the European boardrooms the Internal Market and Services Commissioner Michel Barnier said: “Offenders found guilty of market abuse will finally face jail across the European Union.” According to Justice Commissioner Viviane Reding, the criminal law has a powerful dissuasive effect: “The EU is applying a zero-tolerance policy when it comes to market abuse and rate rigging. We need to protect the integrity of our markets and we need to protect the money of our citizens." With the “European Market Abuse Directive” the EU considerably strengthened the member states’ powers to detect and severely sanction insider trading and market manipulation.

The next logical step – earmarking of fines

In the actual practice, EU fines flow in the domestic budget of the Union and will be refunded for the member states in the key of their contribution, but they are not yet subject to a specific purpose as disbursement to the concerned parties and in the competition affected industries and markets.

In this respect a certain reforming zeal has been recognisable throughout the previous year both in the European Competition Network (ECN) and in the EU Commission. If demonstrably global, non-European competitors damage competition in the EU and European consumers through the exploitation of their market power, a logical step in the right direction would be to redistribute the imposed fines as well as the penalties stemming from violations of the European competition law exactly to the affected economic sectors. With such an approach the European IT industry, for example, could significantly strengthen its innovation potential and thus accelerate the realisation of the digital domestic market. With this “financial assistance” European software companies could massively strengthen their independence through the exploitation of open source models. Moreover, net operators could guarantee a blossoming future to the European IT infrastructure (password: Union-wide expansion of optical broadband networks).

The Fibre to the Home Council Europe (FTTH) calculated in this relation that the Europe-wide upgrade of the IT infrastructure with fibreglass connections until 2020 would require a 201 billion Euros investment. With an extensive optical network almost unlimited transmission capacities would be available for all of today’s existing multimedia applications as well as for future applications. At the same time, the DWDM (dense wave division multiplexing) transmission technology based on fibre optic cables uses a complex encryption method, through which Europe could enormously upgrade and strengthen its lifelines of information and communication.

Of course European net operators should change their actual strategies of expansion in the direction of a future-proof fibreglass-backbone instead of investing the same amount of money on the gradual adaptation and upgrading through VDSL2-connections. With the earmarking of the revenues generated of penalties stemming from violations of the European competition law and flowing the in the ICT field, an additional feed effect would evolve for the required changeover to optical networks. Violations of the competition law affects other fields as well, but today’s dominating American and Asian IT companies protect their market at any price, even under the acceptance of fines. From this perspective an earmarking would not only sustainably re-sharpen the contours of the European competition law, but it would strengthen the ICT industries of Europe. Ultimately, such a continental effort would be the clear sign for the absolute independence of Europe as a business location from the IT giants of competing global economic powers. The debate for the financing of a Schengen-area for European data is therefore urgently overdue.