CJEU rejected AG Wathelet's proposal for vicarious liability for agent's behaviour in competition law: a more stringent test, but how stringent? (C-542/14)

In its Judgment of 21 July 2016 in VM Remonts and Others, C-542/14, EU:C:2016:578, the Court of Justice of the European Union (CJEU) issued an important clarification of the rules applicable to the attribution of (vicarious) liability for infringements of EU competition law, thus expanding its case law on the subjective elements (ie mens rea-like requirements) of the prohibition of anticompetitive behaviour in Art 101(1) TFEU.

In doing so, the CJEU rejected the proposal for stringent vicarious liability formulated by AG Wathelet (see my criticism here) and formulated a more stringent test for the attribution of anticompetitive behaviour of an independent agent. The test formulated by the CJEU raises some interpretative issues, though, and it deserves some comment.

It is worth reminding that the case addressed issues concerning the imputability of anticompetitive practices in which a third party services provider is engaged to the 'client' undertaking that hired those services (ie how to make the 'client' undertaking liable for the anticompetitive behaviour of one of its services providers). 

The case was quite convoluted because it concerned the imputability of a bid rigging offence to a supplying company that engaged a consultant to help it formulate a bid in a tender for a public contract. After the fact, it became apparent that the consultant engaged in collusion with other tenderers in the same bid. The question was, thus, to what extent the bidder should be liable for the collusion that resulted from the allegedly independent activity of the consultant (third party services supplier) and, in any case, what level of proof of anticompetitive intent would be necessary to impose liability on the 'client' undertaking.

In addressing this issue, the CJEU rejected a parallelism between the rules applicable to an undertaking's employees to its agents, and determined that 'where a service provider offers, in return for payment, services on a given market on an independent basis, that provider must be regarded, for the purpose of applying rules aimed at penalising anti-competitive conduct, as a separate undertaking from those to which it provides services and the acts of such a provider cannot automatically be attributed to one of those undertakings' (C-542/14, para 25, emphasis added).

However, the CJEU stressed that this different treatment is based on the independence of market activity of the service provider and, consequently, it would not be justified where the client undertaking exerted significant control over the apparently independent service provider. To that effect, the CJEU determined that

Article 101(1) TFEU must be interpreted as meaning that an undertaking may, in principle, be held liable for a concerted practice on account of the acts of an independent service provider supplying it with services only if one of the following conditions is met:
–  the service provider was in fact acting under the direction or control of the undertaking concerned, or
– that undertaking was aware of the anti-competitive objectives pursued by its competitors and the service provider and intended to contribute to them by its own conduct, or
–  that undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the service provider and was prepared to accept the risk which they entailed (C-542/14, para 33, emphasis added).

Of particular relevance in the field of public procurement, the CJEU also provided some clarification regarding the unauthorised disclosure of commercially sensitive information by the agent, by stressing that

Whilst it is true that [an undertaking is liable for a competition infringement] when that undertaking intended, through the intermediary of its service provider, to disclose commercially sensitive information to its competitors, or when it expressly or tacitly consented to the provider sharing that commercially sensitive information with them ... the condition is not met when that service provider has, without informing the undertaking using its services, used the undertaking’s commercially sensitive information to complete those competitors’ tenders (C-542/14, para 32, emphasis added).

In my view, the VM Remonts Judgment should be welcome for what it does not do. That is, for its rejection of AG Wathelet's proposal for a reversal of the burden of proof, to the effect that the 'client' undertaking would have been considered liable unless it could adduce sufficiently convincing evidence (i) relating to the fact that the agent (services provider) had acted outside the scope of the functions that had been entrusted to it, (ii) regarding the precautionary measures taken by the ‘client’ undertaking at the time of designation of the agent and during the monitoring of the implementation of the functions in question, and (iii) regarding the ‘client’ undertaking's conduct upon becoming aware of prohibited behaviour--so as to demand a public distancing and positive reporting, under the analogous rules of Dansk Rørindustri and Others v Commission, C-189/02 P, C-202/02 P, C-205/02 P to C-208/02 P and C-213/02 P, EU:C:2005:408.

However, regarding the positive test that it sets for the assessment of whether anti-competitive activity by an agent can be imputed to the client undertaking, the VM Remonts Judgment seems less satisfactory, in particular due to the last condition of the test in its paragraph [33], whereby 'an undertaking may, in principle, be held liable for a concerted practice on account of the acts of an independent service provider supplying it with services ... if  ... that undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the service provider and was prepared to accept the risk which they entailed' (emphasis added).

This seems to be an adaptation of the test developed in Commission v Anic Partecipazioni, C-49/92 P, EU:C:1999:356, paragraph [87], to which the CJEU refers in VM Remonts to stress that 'an undertaking may be held liable for agreements or concerted practices having an anti-competitive object when it intended to contribute by its own conduct to the common objectives pursued by all the participants and was aware of the actual conduct planned or put into effect by other undertakings in pursuit of the same objectives or that it could reasonably have foreseen it and was prepared to accept the risk' (C-542/14, para 29, emphasis added).

The adaptation of this test to cases of anticompetitive behaviour by an agent seems problematic because it stretches its last part concerning the acceptance of a risk of occurrence of anticompetitive behaviour by third parties (in that case, co-conspirators). In Anic, the undertaking concerned had been attending meetings with other undertakings that formed part of a cartel. Therefore, the assessment of whether the undertaking could reasonably foresee specific types of anti-competitive conduct by its co-conspirators (formally, third parties) derives from its own participation in meetings--that is, derives from its own observation of the behaviour of other entities that participate in the anti-competitive practice.

This cannot be the case in a scenario such as that presented by VM Remonts, where the client undertaking does not participate in any meetings and where it has no (proven) knowledge of the activity of the agent. In these cases, it would seem that the first two prongs of the VM Remonts test would suffice: ie the client undertaking is liable for the anticompetitive behaviour of the agent if (a) it controls the agent or (b) is aware of the anti-competitive behaviour between the agent and third parties, and aims to contribute to it. Introducing the third condition, according to which the client undertaking can also be liable if (c) it could have reasonably foreseen anticompetitive behaviour between its agent and third parties and was prepared to accept the risk which they entailed, seems to far fetched. 

Whereas in an Anic-like scenario the reasonable prediction of anticompetitive behaviour by co-conspirators derives from information directly acquired in the meetings in which the undertaking participates--that is, can be presumed under logical rules--in a VM Remonts-like scenario, any claim as to the undertaking's duty to foresee anticompetitive behaviour would be pure speculation.

If the client undertaking has no positive knowledge of the anticompetitive behaviour in which the agent [otherwise, the prong (b) of the test would apply], how is it ever going to be possible to determine that it ought to have foreseen it? If this is on the basis of its relationship with the agent, this dangerously reopens the door to a test like the one developed by AG Wathelet or, worse, creates a sort of culpa in eligendo of its agent that is equally troublesome.

If (factual) speculation is to be avoided and the imposition of vicarious liability is rejected by the CJEU in VM Remonts (para 26, although see para 27, which makes it less clear-cut), the only reasonable interpretation of the prong (c) of the test developed in paragraph [33] of VM Remonts is that it can simply never be applied. In which case, one can be forgiven for wondering if the CJEU did not pay sufficient consideration to the adaptation of the Anic test to a situation involving an independent service provider.

AG Wathelet proposes creation of excessive presumption of liability for third party infringement of Art 101 TFEU (C-542/14)

In his Opinion of 3 December 2015 in case VM Remonts and Others, C-542/14, EU:C:2015:797 (not yet available in English), Advocate General Wathelet advised the Court of Justice of the European Union (CJEU) on issues concerning the subjective elements (ie mens rea-like requirements) of the prohibition of anticompetitive behaviour in Art 101(1) TFEU. 

In particular, the case addresses issues concerning the imputability of anticompetitive practices in which a third party services provider is engaged to the 'client' undertaking that hired those services (ie how to make the 'client' undertaking liable for the anticompetitive behaviour of one of its services providers). In my view, AG Wathelet's proposal is clearly excessive (see critical assessment below) and deserves closer inspection. 

The case is quite convoluted because it concerns the imputability of a bid rigging offence to a supplying company that engaged a consultant to help it formulate a bid in a tender for a public contract. After the fact, it became apparent that the consultancy engaged in collusion with other tenderers in the same bid. The question was, thus, to what extent the bidder should be liable for the collusion that resulted from the allegedly independent activity of the consultancy (third party services supplier) and, in any case, what level of proof of anticompetitive intent would be necessary to impose liability on the 'client' undertaking.

In AG Wathelet's Opinion, it is not necessary to prove a personal behavior of any corporate officer of the 'client' undertaking, or his knowledge or consent to the behavior of the external services provider that also acted on behalf of other participants in a possibly prohibited agreement. AG Wathelet proposes to create a presumption of (vicarious?) liability, so that it is incumbent upon the 'client' undertaking to adduce sufficiently convincing evidence to rebut that presumption and escape liability. 

In particular, AG Wathelet considers that the necessary proof concerns (i) evidence relating to the fact that the third party (services provider) has acted outside the scope of the functions that had been entrusted to it, (ii) evidence regarding the precautionary measures taken by the 'client' undertaking at the time of designation of the third party and during the monitoring of the implementation of the functions in question, and (iii) evidence regarding the 'client' undertaking's conduct upon becoming aware of prohibited behavior.

AG Wathelet's VM Remonts Opinion follows the expansive/strict interpretation of the subjective elements in the prohibition of Art 101(1) TFEU in recent cases such as AC-Treuhand v Commission (C-194/14 P, EU:C:2015:717, re liability of a cartel facilitator, see an interesting comment here); Schenker and Others (C-681/11, EU:C:2013:404, re reliance on third party advice, see comments here); or Kone (C-557/12, EU:C:2014:917, re extension of 'umbrella' liability for damages to third parties to a cartel, see comments here). 

This is a very relevant opinion, with potentially very significant effects commensurate to those of the presumption of liability of the parent company, which has shaken competition law enforcement in the EU for the last 5 years or so.  

Therefore, it is interesting to look at AG Wathelet's reasoning in some more detail:
60. In my view, two extreme positions must be rejected. On the one hand, the automatic imputation of responsibility to the undertaking for the actions of a third party, regardless of the degree of involvement of the undertaking, which would go against fundamental principles governing the imposition of competition law sanctions (in particular the principles of personal responsibility and legal certainty), and, on the other hand, the obligation of the competent competition authority to demonstrate convincingly that the undertaking receiving the services from the third party was aware of the criminal acts committed by the latter or had consented to them, which would create a risk of seriously undermining the effectiveness of competition law.
61. Indeed, "... the prohibition on participating in anti-competitive practices and agreements and the penalties which infringers may incur are well known, it is normal that the activities which those practices and agreements involve take place in a clandestine fashion, for meetings to be held in secret, frequently in a non-member country, and for the associated documentation to be reduced to a minimum. " Therefore, it would be too easy to "hide" behind a third party in order to go unpunished under competition law.
62. Moreover, the importance of keeping free competition allows for companies that entrust third parties with functions such as those at issue in the present case [ie public procurement consultancy services] to be required to take all possible precautions to prevent such third parties from infringing competition law, avoiding, in particular, any negligence or recklessness in the definition or in the monitoring of these functions.
63. In line with this, the solution I propose for cases such as that in the main proceedings is to establish a rebuttable (iuris tantum) presumption of liability of the undertakings for acts contrary to competition law committed by a third party whose services it has engaged and which cannot be considered its subsidiary or ancillary body. Such a presumption can maintain the balance between, on the one hand, the objective of effectively suppressing behavior contrary to the competition rules, in particular to Article 101 TFEU, and to prevent their recurrence bearing in mind that respect for these rules requires an active corporate behavior at all times and, on the other hand, the requirements arising from the fundamental rights regarding the imposition of sanctions. Such a presumption would apply even if the acts performed by the third party were different from the functions entrusted to it, and even when it was not possible to demonstrate that the undertaking that used the services was aware of the acts of the provider or consented to them.
64. This presumption should apply to an undertaking from the moment the authority responsible for the enforcement of competition rules proves the existence of an act contrary to competition law committed by a person working for (or providing services to) the undertaking but which does not, directly or indirectly, form part of its organisational chart.
 65. In order to respect the balance to which I referred in point 63 of this Opinion, the undertaking may rebut the presumption of liability by submitting all elements supporting its claim that it was unaware of the illegal behavior  in which the third party service provider engaged, and by demonstrating that it took all necessary measures to prevent such a breach of competition law precautions, and this in three stages.
66. The first is when his appointment or hiring occurs. It refers in particular to the choice of supplier, the definition of the functions and the monitoring of its implementation, the conditions (or exclusion) of recourse to subcontracting, obligations to ensure respect for the law, in particular, competition, and the sanctions for breach of contract, as well as whether authorization was required for  any act not provided for in the contract.
67. The second stage includes the period of execution of the functions entrusted to the third party, ensuring that the latter strictly sticks to its functions as defined in the contract.
68. The third stage is when the third party commits a breach of competition law, even if committed at the back of the undertaking. The undertaking cannot simply ignore that behaviour, it should distance itself publicly from the forbidden act, prevent its repetition or report it to the administrative authorities. Indeed, as stated by the Court: "... passive modes of participation in the infringement, such as the presence of an undertaking in meetings at which anti-competitive agreements were concluded, without that undertaking clearly opposing them, are indicative of collusion capable of rendering the undertaking liable under Article [101(1) TFEU], since a party which tacitly approves of an unlawful initiative, without publicly distancing itself from its content or reporting it to the administrative authorities, encourages the continuation of the infringement and compromises its discovery" (C-542/14, paras 60-69, references omitted, own translation from Spanish, emphasis added).
In my own opinion, the creation of the presumption proposed by AG Wathelet goes way too far. In simple conceptual terms, it excessively erodes the principle of personal responsibility and falls short of meeting the desirable balance that the AG presents himself. The 'client' undertaking and the third party service provider are, in these cases, completely independent undertakings and the creation of the presumption would go beyond the acceptable limits of expansion of the concept of (functional) single economic entity. 

Plainly, it is excessive to impose this type of burden of proof (probatio diabolica) on undertakings that simply lack the knowledge and manpower required to monitor the execution of the activities contracted out to the third party to the standard created by AG Wathelet. This applies at least in stages one (design of the contract) and two (monitoring of execution), where the 'client' undertaking will in many cases be affected by significant asymmetries of information and gaps in human capital. Otherwise, what would be the economic rationale for contracting out something the undertaking could carry out on its own?

I would thus prefer the CJEU to deviate from the proposal of AG Wathelet in this case and to reject the creation of such rebuttable presumption of liability for the anticompetitive behaviour of third parties to which a 'client' undertaking has outsourced certain types of functions. The competent competition authority should always be obliged to demonstrate, at least at the level of sufficient indicia (balance of probabilities, but for?), that the recourse to the third party aimed to circumvent the prohibition of Art 101(1) TFEU--ie, that there was an anticompetitive agreement (by object) between the 'client' undertaking and the third party services provider because the outsourcing had the object of creating further restrictions of competition (on the issue of prohibitions by object, see here). Thus, if the contracting out arrangement was not genuine or if there are indications that the outsourcing aimed at a restriction of competition, then the burden of proof could be reversed. But to create a presumption of liability in the way that AG Wathelet proposes is excessive.

New Paper: A critical assessment of the new health care procurement rules in the UK

The recently adopted UK National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013 include an interesting (and somehow unsettling) provision authorising anti-competitive behaviour in the commissioning of health care services by the National Health Service (NHS), if that is in the (best) interest of health care users.
As briefly discussed here, generally, it seems that under the new public procurement and competition rules applicable to the NHS, whatever is considered in the “interest of patients” could trump pro-competitive requirements and allow the commissioning entity to engage in distortions of competition (either directly, or by facilitating anti-competitive behaviour by tenderers and service providers)—as long as a sort of qualitative cost-benefit analysis shows that net advantages derived from the anti-competitive procurement activity. The apparent oddity of such general “authorisation” for public buyers to engage in anti-competitive procurement of health care services deserves some careful analysis, which this new paper carries out.

The paper assesses Regulation 10 of the NHS Procurement, Patient Choice and Competition Regulations 2013 and the substantive guidance published by the UK's health care sector regulator (Monitor) from the perspective of EU economic law (and, more specifically, in connection to public procurement and competition rules). The paper claims that there is a prima facie potential incompatibility between Regulation 10 of the 2013 NHS Procurement, Patient Choice and Competition Regulations and both EU competition law and public procurement law—which are, in principle, opposed to any anti-competitive or competition restrictive behaviour in the conduct of public procurement activities. Consequently, there is a need for an EU law compliant, restrictive interpretation and enforcement of the provision—at least where there is a cross border effect on competition and/or a cross border interest in tendering for the health care contracts, which triggers the application of both EU competition law and public procurement law.
 
Sánchez Graells, Albert, New Rules For Health Care Procurement in the UK. A Critical Assessment from the Perspective of EU Economic Law (February 2, 2014). University of Leicester School of Law Research Paper No. 14-03. Available at SSRN: http://ssrn.com/abstract=2389719.