General Court rules on liability of parent company for Spanish raw tobacco cartel

01 October 2010

Richard Eccles

On 27 October 2010 the General Court handed down its judgment on an appeal (Case 7-24/05) by Alliance One International Inc, Standard Commercial Tobacco Co (“SCTC”), Inc and Trans-Continental Leaf Tobacco Corp Ltd (“TCLT”) against the European Commission’s decision of 2004 finding that applicants to be jointly and severally liable for the fine imposed on World Wide Tobacco Espana, SA (“WWTE”) for participating in a cartel in the Spanish raw tobacco market. However, because the Commission had not established that TCLT had actually exercised decisive influence over WWTE’s conduct on the market, the decision was annulled in respect of TCLT’s liability. This partial annulment does not affect the other two parent companies’ liability on which the Commission’s findings were upheld, nor the level of the fine. The judgment shows that even a majority shareholder may not be liable for fines for infringements by a subsidiary in which its interest are purely financial.

WWTE is one of the four undertakings established in Spain and engaged in the first-stage processing of raw tobacco. Between 1998 and May 1999 TCLT held more than two-thirds of the capital of WWTE. TCLT is a wholly-owned subsidiary of SCTC, which is itself a wholly-owned subsidiary of the American multinational Standard Commercial Corp. (“SCC”) (now Alliance One International Inc). In October 2004 the Commission issued a decision finding that the four Spanish processors of raw tobacco, including WWTE, had participated in a cartel in the Spanish raw tobacco market, breaching Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”). WWTE was fined EUR 1,822,500, to be paid by TCLT, SCTC and SCC, on the basis that they exercised effective control over WWTE.

An action before the General Court was brought by the applicants (SCC, TCLT, SCTC), seeking the annulment of the Commission’s decision, claiming that the Commission erred in holding them jointly and severally liable for the WWTE’s infringement. WWTE also brought forward an appeal challenging the level of the fine imposed.

The General Court examined the tests used by the Commission to attribute liability to a parent company. When a parent company has a 100% share in a subsidiary there is a presumption that it exercises decisive influence over the conduct of its subsidiary, thus forming a single economic unit and therefore a single undertaking. However, this presumption is rebuttable if the parent company can prove that it did not exercise decisive influence over the conduct of the subsidiary. The Commission further relied on a test of whether the parent company was able to exercise and actually exercised decisive influence. However it concluded that the parent companies of two of the cartels participants were not liable for their subsidiaries’ infringements despite holding stakes of 80% or 90%, due to a lack of evidence of actual exercise of decisive influence.

As regards TCLT and WWTE, the General Court examined the existence of a single economic unit from March 1996 to May 1998 and from May 1998 to the date of the decision. The Commission found that in order to establish the presence of actual decisive influence it was not necessary to demonstrate that the applicants gave instructions to WWTE to commit the infringement or that they were directly involved in it. The Commission examined three main factors with regard to the first period in order to establish whether decisive influence was taking place. The General Court found that the Commission was correct to hold that SCC and SCTC exercised decisive influence over WWTE’s market conduct. However it over-turned the finding that TCLT exercised decisive influence over WWTE’s conduct on the market, as TCLT was a company with no activities of its own and its interest in WWTE was purely financial. Thus the Commission was wrong to find for that period that TCLT took part in WWTE’s unlawful conduct.

When examining the second period for the existence of a single economic unit from 1998 to the date of the decision, the General Court looked at the factors taken into account by the Commission in order to demonstrate that decisive influence was exercised over WWTE’s conduct during that period. It concluded that the Commission established to the requisite legal standard that during this second period SCC and SCTC exercised decisive influence over WWTE’s conduct. However it rejected the Commission’s finding that TCLT had exercised such influence during that period, as the evidence relied on did not support this conclusion.

The General Court confirmed the Commission’s findings attributing the liability for WWTE’s infringement to SCC and SCTC and therefore holding them jointly and severally liable for payment of the fine. However, the Commission’s decision in respect of TCLT was annulled because the passive nature of its financial interest meant that it did not exercise the actual decisive influence required.