This July, the Court of Justice of the EU ("CJEU") delivered a judgment (the VM Remonts case, C-542/14), which clarified the requirements under which a company can be held liable for competition law infringements by third party contractors. This article examines the basis for the decision, and how companies can protect themselves from increased risk.
Given the growing complexity of business processes and the narrowing specialisation of companies, subcontracting to third parties and in turn further down the business chain is a common trend in the current economic climate. Tasks that are commonly subcontracted vary from drafting tender documentation, carrying out benchmarking studies, statistical collection and marketing surveys to price-cost analysis.
For companies that are likely to share common third party contractors with their competitors, this judgment provides useful guidance that should be carefully woven into companies' competition compliance policies, and general market conduct and awareness.
The legal background
Briefly explained, a Latvian council requested a call for tenders for food supplies to schools. Three companies responded to the request, which we will refer to as A, B, and C for simplicity.
Company A subcontracted the formal preparation and submission of its tender to a third party legal contractor. That legal contractor directly subcontracted the job to another company, which we refer to as the Contractor.
Unknown to Company A, the same Contractor was also hired by both Companies B and C to help prepare their respective bids. Ultimately, the Contractor then set the bids of Companies B and C with direct reference to A's bid, thereby coordinating the three, and undercutting Company A by 5% and 10% respectively.
Initially, the Latvian Competition Council fined all three companies for preparing their tenders jointly with the aim of creating the impression that there was actual competition between them. This decision was appealed to the Regional Administrative Court which concluded that the infringement decision would be annulled in respect of Company A, since its involvement was not demonstrated, but was upheld in respect of Companies B and C. This was further appealed to the Latvian Supreme Court, which ultimately referred the question of whether a company could be liable for a contractor's or sub-contractor's participation in a concerted practice to the CJEU.
The Court's analysis
The judgment discusses two distinct types of liability for cartel infringements: liability for employees, and liability for independent contractor's actions.
Firstly, it focuses on liability that can be attributed to a company from its employees' actions. The Court confirms that:
- an employee is considered to be incorporated into the economic unit compromising of a company; and
- a company will therefore be held liable for the anti-competitive actions of its employees, even if the employee was acting contrary to given instructions.
Secondly, the Court acknowledges that liability can be attributed to a company from independent contractors' actions in certain circumstances. In this case, the Court generally confirmed that:
- an independent entity cannot be compared to a company's employees, and should be considered as a separate undertaking from those companies to which they provide services; and
- in general, the actions of such contractors or sub-contractors cannot automatically be attributed to the contracting company.
However, the judgment then considers situations when the illegal actions of an independent contractor may be attributed to a contracting company. Indeed, the court confirms that a company can be held liable for a concerted practice carried out by an independent contractor in each of the following individual situations (which are not cumulative):
- The contractor essentially acts under the direction or control of the contracting company that is using its services. This may be inferred from the fact that the activity is carried out with little autonomy or flexibility by the contractor, or from some other specific organisational, legal or economic links between the contractor and the company. In this situation the contractor has only notional independence; or
- The contractor is genuinely independent, but the contracting party is otherwise aware of the anti-competitive objectives of its competitors and the contractor, and contributes towards them via its own conduct. This would be fulfilled where the company intended through the contractor to disclose sensitive information to its competitors, or where it expressly or tacitly consents that the contractor shares such information with them. On the other hand, if the contractor only illicitly uses such sensitive information of its own accord to complete competing tenders, without the company’s knowledge, this would not qualify; or
- The contractor is genuinely independent, but the contracting party can reasonably foresee that the contractor will share its sensitive information with its competitors, but is prepared to accept that risk.
Practical advice and on-going compliance
This decision is important for companies that commonly engage third party contractors and sub-contractors, such as companies in production industries, third party trading intermediaries (i.e. brokers, dealers and operators of online platforms), and companies dependent on external IT solutions (i.e. data aggregators, price reporting agencies, market research organisations and trade associations).
Not only can a company be held liable and fined for anti-competitive conduct by a competition authority for the actions of its contractor, but it may also be subject to follow-on damages claims for such conduct in the courts.
Below are some practical recommendations to ensure ongoing competition compliance when engaging contractors, which should limit the risk that contracting companies face:
Drafting the Contract
Proper drafting of the contract is essential, as a company will commonly not have enough information or resources to monitor all of its contractors and their market practices. This is all the more important if the contractors collect, access or disseminate commercially sensitive information. The contract should ideally:
- specify that the contractor is independent and free to deliver on the project under its own responsibility; and
- include the following clauses:
- a non-disclosure clause to protect sensitive information;
- a commitment on the contractor's part to comply with competition law;
- a limitation on subcontracting the services commissioned to the contractor; and
- a potential exclusivity clause preventing engagement with competitors for a particular bid or product-range.
Updating Compliance Programmes and Training
Companies are also advised to update and educate employees that are involved in contracting to third parties and that deal with any potentially sensitive information (such as prices, costs, bidding processes and market strategies). Such employees need to be aware of the competition risks of outsourcing to third party contractors. Different situations should be monitored for their level of associated risk, and the legal department should take a hands-on approach to dealing with all potentially high-risk situations.