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Fishing expeditions, forensic imaging and fines: important developments relating to European Commission dawn raids

Kim Dietzel, Craig Pouncey, Kyriakos Fountoukakos, Molly Herron, Herbert Smith Freehills Competition eBulletin, 2012.

See Kyriakos Fountoukakos's resume See Molly Herron's resume See Craig Pouncey's resume See Kim Dietzel's resume

1. Introduction

During the course of 2012 there have been various developments at the EU level in relation to the unannounced inspections or "dawn raids" regularly conducted by the Commission in competition law cases.

The General Court has ruled on challenges to the dawn raids carried out by the Commission in its Power cables investigation, providing an important warning to the Commission that it does not have the power to conduct "fishing expeditions", but avoiding ruling on the legality of the Commission’s claimed powers in relation to electronic searches. Decisions of the European Court of Justice ("ECJ") and the Commission, upholding and imposing fines on companies for obstruction during dawn raids, have also emphasised the co-operation obligations owed by companies during dawn raids and the risks of getting it wrong.

2. Commission dawn raid powers

Power cables - challenges to Commission dawn raids

On 14 November 2012 [1], the General Court issued its judgments in the appeals brought by Nexans and Prysmian in respect of the 2009 dawn raids carried out by Commission officials at the premises of Nexans in France and Prysmian in Italy in connection with a suspected cartel in the power cables sector [2]. The Commission decisions authorising the raids ("Inspection Decisions") were drafted in broad terms, specifying the subject matter of the investigation as "the supply of electrical cables and material associated with such supply, including, amongst others, high voltage underwater electrical cables and, in certain cases, high voltage underground electric cables".

During the raids the Commission made forensic images of certain computer hard drives, placed these in sealed envelopes and took these away at the end of the raid for later review at the Commission’s premises, rather than reviewing documents contained on these hard drives on site (for example by applying search terms). The Commission also questioned a Nexans employee during the raids.

Both Nexans and Prysmian challenged the dawn raids before the General Court on various grounds.

Scope of and basis for the Inspection Decisions

Breadth of Inspection Decisions

Firstly, the companies claimed that the Inspection Decisions authorising the dawn raids should be annulled as overly broad and imprecise both in terms of their product and geographic scope, arguing that in practice they covered the entirety of their businesses, and amounted to a "fishing expedition" by the Commission.

The General Court emphasised that an inspection decision must be drafted carefully and must sufficiently specify the "essential characteristics" of the subject matter and purposes of the inspection in order that the company in question can assess the scope of its duty to co-operate and to safeguard its rights of defence. The General Court recalled that, contrary to the Commission’s submissions, the Commission is required to restrict its searches during a raid to activities relating to the sector(s) covered in the inspection decision, and therefore if it locates documents not relevant to these sectors it cannot use these.

However, on the facts the General Court held that the Inspection Decisions, although broad, were not illegitimately imprecise in scope. It therefore rejected this ground of appeal.

Sectors covered by the Inspection Decisions

Secondly, the companies argued that the Commission did not have reasonable grounds to suspect an infringement of competition law, such to justify the carrying out of a dawn raid, in relation to allelectrical cables.

This ground of appeal was successful. The General Court, having examined the evidence available to the Commission at the time of the Inspection Decisions, found that the Commission only had reasonable grounds to order dawn raids relating to the supply of high voltage underwater and underground electrical cables (and associated materials), in relation to which it had received a leniency application. The General Court therefore annulled the Inspection Decisions insofar as they related to any other form of electrical cables.

Implications of the judgment

In terms of the consequences of this ruling for the case, the General Court rejected the parties’ request that it order the Commission to return any documents obtained pursuant to the annulled parts of the Inspection Decisions (i.e. documents relating to non-high voltage cables). The General Court held that it did not have the power to issue such directions; the Court only has the power to annul (completely or partially) the Commission decision under review - the Commission is obliged to comply with the Court’s judgment, but the Court has no power to issue specific directions to the Commission as to how to do so. In this case it is therefore left to the Commission to determine the consequences of the annulment ruling – for example whether it needs to return documents relating to non-high voltage cables in its case file to the relevant parties, and the impact of this for the future conduct of the case.

In terms of implications of the judgment more generally, the Commission is likely to draft its inspection decisions more carefully, ensuring that the scope of the investigation is clear and only extends to sectors for which it has specific evidence amounting to a reasonable suspicion of a potential infringement. Increasingly, cartel investigations are being commenced following the Commission’s receipt of one or more leniency applications. The content of these applications are likely to define the scope of the inspection decisions.

Commission actions during the dawn raids

Challenges

The parties also challenged the Commission’s actions in taking away the forensic copies of computer hard drives for later review at the Commission’s premises, arguing that the Commission does not have the power to do so under the relevant legislation, its powers being limited to searching for relevant documents on site. Nexans also challenged the Commission’s questioning of one of its employees on site, arguing that the Commission asked questions which infringed the principle against self-incrimination.

Judgment

The General Court ruled that these challenges were inadmissible and that it did not have the power to rule on these, on the basis that the actions taken by the Commission during the dawn raids were intermediate measures taken pursuant to the Inspection Decisions, rather than reviewable acts having binding legal effects in their own right. The General Court drew a distinction between the Commission’s actions challenged in this case, and Commission actions in previous dawn raids to review documents which companies claimed were covered by legal professional privilege, which have been held to produce immediate legal effects (given the protection for privileged documents is being denied) and therefore be subject to review by the General Court [3].

The General Court stated that the only way to challenge the measures in question would be for the companies to challenge any ultimate cartel infringement decision, or for the companies to have refused to allow the Commission to carry out the measures, prompting the Commission to issue an infringement decision penalising the companies for obstructing the inspection, and then challenging that penalty decision.

Implications of judgment

It is unfortunate that the General Court was not able to rule on the Commission’s controversial practice of taking forensic images of the entirety of digital storage mediums (such as hard drives) for subsequent review (which it claims the power to exercise within its "explanatory note" on authorisations to conduct inspections [4]), rather than assessing whether the electronic documents fall within the scope of the investigation on site and only taking copies of those documents which are relevant and which are not covered by legal professional privilege (extending the dawn raid over more than one day if necessary to do so).

As a result of the absence of judicial scrutiny at an intermediate stage, companies are left in a difficult position. If they prevent the Commission taking such actions during a dawn raid they expose themselves to the risk of the imposition of fines for obstruction or an uplift in any ultimate fine (see below). If they allow the Commission to go ahead they must wait for a final infringement decision of the Commission, based in part on evidence seized during the dawn raid, to raise any challenge.

It is therefore essential that companies are well advised on the scope of the Commission’s powers, and whether and how to raise any challenges during a dawn raid, as well as on the practical steps which should be taken in relation to any disputed actions (such as entering into a written agreement with the Commission that any sealed envelopes containing copies of hard drives will only be opened in the presence of the company’s lawyers, in order that they can make submissions on privilege and relevance).

Outstanding challenges to Commission powers

Further guidance on the scope of the Commission’s dawn raid powers (and its information gathering powers more generally) may follow in due course, as there are a number of other legal challenges to the Commission’s actions pending before the General Court [5].

3. Risks and responsibilities on undertakings

As noted above, under Regulation 1/2003 the Commission can impose fines on companies for failing to submit to or for obstructing a dawn raid, including for failure to produce documents or answer questions, providing misleading or incorrect answers to questions, or breaking a seal affixed by the Commission to preserve evidence (for example to seal rooms or cabinets overnight).

Such fines can be up to 1% of worldwide group turnover, and can be very significant in practice, as underlined by the recent cases discussed below. The Commission can also increase the fine imposed for any infringement of the substantive competition law prohibitions ultimately found by the Commission; for example, the Commission increased the fine imposed on Sony in its Professional video tape cartel decision by 30% for a refusal to answer questions and the shredding of documents during a dawn raid [6].

E.ON - Commission fine for breaching a seal confirmed by the ECJ

On 22 November 2012 [7], the ECJ upheld a fine of €38m imposed by the Commission on E.ON for breach of a seal during a dawn raid.

The ECJ rejected an appeal brought by E.ON against a 2010 General Court judgment which had dismissed E.ON’s initial appeal against the Commission fining decision [8]. Before the ECJ E.ON had again argued that the Commission had not proved that E.ON had intentionally or negligently broken the seal (challenging the «void« marks which appeared on the seal on the basis that this could have been for other reasons, for example the age of the seal, the use of abrasive cleaning products, humidity, vibrations, or incorrect affixing of the seal by the Commission), and that the fine imposed was disproportionate. These arguments were rejected.

In the course of its judgment the ECJ held that breach of a seal is in itself a particularly serious offence, even absent any evidence that anyone actually entered the sealed room or tampered with any documents. This is also reflected by the €8m fine previously imposed on Suez by the Commission for breach of a seal during a dawn raid in another case [9].

EPH – Commission fines for failure to provide access to electronic documents

On 28 March 2012 [10], the Commission imposed fines of €2.5m on two Czech power companies for failing to submit fully to a dawn raid, through obstruction/lack of co-operation in relation to electronic documents.

During the raid the Commission requested access to email accounts to be blocked by setting a password known only to the Commission (to prevent tampering with emails during the raid); however, the password for one email account was modified by the company to allow the relevant employee to access the account. In addition, during the course of the raid an employee requested the IT department to divert all incoming emails to certain blocked email accounts to a server, which prevented the Commission obtaining access to these emails for review.

The companies have now appealed the fining decision [11].

4. Conclusion

The various developments discussed above emphasise that, while the Commission does not have unlimited powers in relation to dawn raids, companies must be very careful when making any tactical challenges to the exercise of the Commission’s powers, as any improper obstruction of the dawn raid can lead to significant fines.

Footnotes

[1EGC, 14 November 2012, Case T-135/09, Nexans France et Nexans / Commission and T-140/09, Prysmian et Prysmian Cavi e Sistemi Energia / Commission.

[2European Commission, 30 June 2011, Case COMP/39.610, Power cables.

[3CFI, 17 September 2007, Cases T-125/03 and T-253/03, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v Commission.

[5For example Cases T-289/11-T-290/11, Deutsche Bahn v Commission and Case T-521/11, Deutsche Bahn v Commissionin relation to dawn raids, and Case T-292/11, Cemex and others v Commission and related cases in relation to information requests issued under Article 18 Regulation 1/2003.

[6European Commission, 20 November 2007, Case COMP/38.432, Professional videotape.

[7ECJ, 22 November 2012, Case C-89/11P, E.ON Energie / Commission.

[8EGC, 15 December 2010, Case T‑141/08, E.ON Energie / Commission.

[9European Commission, 24 May 2011, Case COMP/39.796, Suez environnement - breach of seal.

[10European Commission, 28 March 2012, Case COMP/39.793, EPH and others.

[11Case T-272/12, Commission / Ireland.

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