On October 6, 2021, an important judgment was handed down by the Court of Justice of the European Union (“CJEU”) on the liability of a subsidiary for the actions of its parent. The Court confirmed (in Case C-882/19) that the well-established EU principle of single economic unit applies not only when the competition authorities take enforcement actions (public enforcement) but also in cases when a victim is seeking compensation for damages suffered as a result of the anti-competitive behaviour (private enforcement). Further, and more specifically, the CJEU confirmed that where the existence of an infringement of Article 101(1) TFEU by a parent company has been established, the victim may also bring an action for damages against a subsidiary of that parent company. However, it is not an automatic right to seek damages from the subsidiary and there are some conditions.
Before the victim of the infringement can bring damages action, it must establish that the subsidiary and the parent company constitute a single economic unit on the basis of both (i) economic, organisational and legal links that unite the two legal entities; and (ii) the existence of a specific link between the economic activity of the subsidiary and the subject matter of the infringement. In other words, the victim would need to show that although the subsidiary and parent company have separate legal personalities, the subsidiary does not determine its own conduct on the market, but essentially carries out the instructions given to it by its parent company and that the subsidiary carries out the same economic activities (e.g. supplies the same products) as the subject matter of the anticompetitive infringement.
The subsidiary is able to exercise its rights of defence and, accordingly, is able to argue that it does not belong to the same undertaking, through economic unity, as its parent company. As the Court noted, the subsidiary must be able to refute its liability for damages, inter alia by relying on any grounds that it could have raised if it had participated in the proceedings brought by the Commission against the parent company. However, where the private enforcement action is brought as a result of the Commission’s decision finding infringement by the parent company, the subsidiary cannot challenge, before the national courts, the existence of that infringement found by the Commission.
In the same decision, the CJEU critically also confirmed that Article 101(1) TFEU must be interpreted as trumping any provision of national law which provides for imputing liability for the behaviour of one company to another company only if the second controls the first. Accordingly, national courts must set aside any national legislation that would prevent victims from bringing actions against a corporate subsidiary that is part of the same economic unit as its parent company (which have been found to infringe competition rules) and apply Article 101(1) TFEU directly to that subsidiary.
In conclusion, companies should be aware that under the single economic unit principle developed by the EU Courts for the definition of undertakings under Article 101(10 TFEU), the principle of joint and several liabilities can now be attributed not only to the parent company for the behaviour of its subsidiary (usually during the public enforcement proceedings) but also the other way around. This may seem logically and constitutionally counter-intuitive, as the subsidiary does not usually exercise control over, and does not have knowledge of the actions of its parent. Nevertheless, while the subsidiary can argue that it is not part of the same economic unit, it cannot refute the existence of the anticompetitive behaviour that has been found by the Commission in respect of its parent company.
As damages claims continue to rise in the EU after the implementation of Directive 2014/104/EU we expect to see further EU Court rulings on related issues.