Holding Parents Liable For Antitrust Violations-Differences In U.S. And EU Corporate Governance

Monday, August 30, 2010 - 01:00

Editor: Please describe your background as a newly arrived commercial litigation partner at Proskauer and your focus on antitrust. Tell our readers about your practice.

Kass: I am a commercial litigator, but my primary focus over the past 14 years has been on antitrust matters. Today, I spend much of my time handling investigations brought by the Department of Justice or the Federal Trade Commission. These investigations typically focus on price-fixing cartels, anticompetitive practices, or strategic mergers in concentrated industries. Another big component of my practice involves private civil antitrust litigation, including monopolization cases, competitor lawsuits, and price-fixing class actions. Of course, antitrust in general is becoming increasingly global in nature, so my practice has a big international component as well.

Editor: First, describe the U.S. practice of shielding the parent company of an errant subsidiary that might have violated antitrust laws in this country. How difficult is it for the prosecution to "pierce the corporate veil" to ensnare the parent company in attributing liability?

Kass: Plaintiffs are always looking for deep pockets to sue, hence the reason for the predominance in our society of the corporate form and its cousins, limited liability companies, and limited partnerships. These organizational forms promote growth by encouraging entry into new markets and investment in new initiatives. By ensuring that those with capital are not putting everything they own - their homes, their savings, their other businesses - at risk by investing in risky ventures, the level of liquidity in the economy increases, fueling the engines of economic growth. Recognizing this, courts in the United States have zealously guarded the concept of limited liability. Consequently, it is difficult to hold a parent liable for the wrongs of a subsidiary or an affiliate. In the U.S., there are only two - very limited - circumstances giving rise to parental liability. The first is where the plaintiff "pierces the corporate veil" by showing that the subsidiary is a sham or the "alter ego" of the parent, a tough standard under state and federal law. The second is where the parent is itself a wrongdoer. But even in that case, the parent is being held liable for its own actions, not derivatively for those of its affiliate.

Editor: Describe the outcome in the Best Foods case.

Kass: The Bests Foods case is a seminal Supreme Court case protecting the concept of limited liability under federal law. In that case, the lower court held the parent liable under the federal Superfund statute because the parent exercised substantial oversight over the subsidiary. But the Supreme Court said that neither ownership nor oversight was enough to hold a parent liable under federal law. The Court then cemented the traditional view that a parent is immune from liability unless the wrong was committed directly by it or its alter ego. This is a different rule of law than what appears to be developing in the European Union.

Editor: Contrast the Best Foods definition of parent liability with that of parent companies in the EU. Why is it that not only is a parent vulnerable to liability for a wholly owned subsidiary's errant ways but also vulnerable is a parent with partial ownership of a subsidiary or participant in a joint venture?

Kass: Recent decisions in the EU make it clear that they are willing to cast the net beyond the sham/direct participant tests. What the EU has done is to create a broader test that says that a parent is derivatively liable for the illegal acts of any affiliate over which it exercises "decisive influence." Under this test, a parent's ownership is a relevant fact, but a parent can be derivatively liable even where the affiliate is only partially owned. In fact, as the recent Gips case suggests, a corporation may be liable for other entities within a corporate family even where there is no legal ownership, just practical control.

Editor: Describe the concepts, "economic unit" and "decisive influence" tests, under EU law.

Kass: The EU has a two-step process for determining the amount of the fine and who is responsible for it. The EU will first look at a family of related entities to determine whether they are functioning "autono-mously" or as a single "economic unit." This, in turn, depends on whether there is an overarching hierarchy, corporate structure, or management relationship where decisions are made centrally for a group of related corporate entities. If corporate decisions are made centrally or collectively, they will be found to be a single "economic unit" for purposes of determining liability and calculating fines.

The second step in the process focuses on the specific legal entities that are responsible for the fine. In making this determination, the EU will look beyond formal legal structure and ask which entity held the most influence or control over the entities engaged in the wrongdoing. If a parent has a major influence on the policies and practices of the affiliate (even if it had no involvement in or knowledge of the actual wrongdoing), it will most likely be found to have exercised "decisive influence."

Editor: Describe the facts in the Knauf Gips KG case brought by the Commission. Does this decision foretell of a more expansive role to be taken by European courts? Was the Stora case decided before the Gips case?

Kass: The Stora case was decided before the Gips case and is really the beginnings of the departure between U.S. and EU law in this area. In Stora , the EU acknowledged that - like U.S. law - mere ownership, even sole ownership, is not enough to impose derivative liability. But then, in a departure from U.S. law, it held that there is a presumption that a parent of a wholly owned subsidiary exercises "decisive influence," and can therefore be held liable. While the Stora presumption is theoretically rebuttable, in practice few, if any, corporate parents have escaped liability by rebutting the Stora presumption. This is directly contrary to experience in the U.S. following the Best Foods decision, where parents generally escape derivative liability.

Since Stora , the divergence between the U.S. and the EU has only grown. The most recent EU decision is the Gips case, which significantly extends Stora. In that case, Gips, was held derivatively liable for the acts of entities in which it had no ownership interest. Gips was part of a group of companies controlled by the Knauf family. Gips itself had neither ownership interests in nor direct control - in the traditional corporate governance sense - of a number of the entities within the Knauf family. The EU, nevertheless, held that the entire Knauf family operated as an "economic unit," and that, because Gips was the largest entity within the group - the ringleader so to speak - it exercised "decisive influence" over the entire family. While there was evidence that Gips was also a wrongdoer, the court clearly imposed derivative liability on Gips for acts committed by legally distinct and legitimately incorporated entities in which Gips had no ownership interest.

Editor: Under EU law does a joint venture between co-equal partners protect the partners from liability attributable to the enterprise which is the product of the venture? What factors have been held to play a role in assigning liability to joint venture partners?

Kass: Co-equal joint venture partners are not immune from derivative liability. The Stora presumption - in which parents of wholly owned subs are presumed to exercise decisive influence - does not apply. But this does not mean parents of 50-50 joint ventures are immune. As the Knauf case demonstrates, even zero percent ownership will not necessarily defeat derivative liability. While it might seem that in the 50-50 context, neither parent can itself exercise "decisive influence," the European Commission has held otherwise. In general, in the case of partial ownership, whether one or more of the owners exercises decisive influence will be a question of fact and will depend on factors such as whether the parents control the board of the affiliate: whether there are rotating employees; whether there are common facilities; and whether the parent exercised substantial supervision over the affiliate's policies and practices.

Editor: What are several pitfalls to be avoided by multinationals when setting up the governance of subsidiaries in the EU?

Kass: I am not sure if "pitfalls" is the right word. But there are four potential sources of liability under EU law that need to be considered when evaluating a company's structure and governance model. The first is where a parent is directly involved in, or has knowledge of, the affiliate's wrongdoing. The second is where the subsidiary is wholly owned, which makes its very difficult to avoid derivative liability in the EU. The third is where a parent, particularly one with majority ownership, has exercised effective control over the subsidiary through control at the board level or through common assets or common employees. The fourth, and this is the most vague, is where an entity within a corporate family acts as a ringleader, even though the typical indicia of control that you would normally associate with stock ownership, appointment of board members, etc., is absent.

Editor: What should multinationals consider in structuring their operations in the EU?

Kass: Multinational corporations need to give serious thought upfront about how to structure their global operations, taking into account the differences among jurisdictions in their approach to parental liability. One thing that is especially important in the case of partially owned affiliates and joint ventures is to include some form of indemnity, contribution, or liability sharing provisions in the formation documents to ensure that unforeseen risk is properly, and contractually, allocated among the owners. More generally, the more that can be done to establish that the affiliate is a fully functioning, autonomous legal entity the better. This should include establishing separate legal entities to carry out all activities related to a particular market or product line, limiting the degree of involvement of the parents in the operations of the affiliate, having independent directors on the board, and having a distinct workforce that avoids senior managers rotating between the affiliate and the parent. Of course, in many cases, this may not be possible or consistent with the needs of the business. That is why it is even more important to have in place effective law compliance programs.

Editor: Why are stringent compliance measures a key safeguard in protecting a multinational parent?

Kass: As Benjamin Franklin once said, an ounce of prevention is worth a pound of cure. Stringent and effective compliance programs protect everybody; they protect the parent, as well as the affiliate. Not only will an effective compliance program - hopefully - prevent violations from occurring in the first place, it serves an important role in putting those who supervise the affiliate's activities on their guard, identifying where the potential traps are, and providing guidance on how to eradicate any potential wrongdoing within the subsidiary during its incipiency.

Editor: The EU Commissions has extended its reach in pursuing these cases in recent years.

Kass: Clearly, the European Commission has been increasingly active over the last few years, aggressively expanding their enforcement activities. They are not only testing the boundaries of competition law, but they are also pushing the envelope in terms of who they can hold liable and for how much. Ultimately, given the benefits that limited liability confers on the economy in terms of increased capital availability and liquidity, I suspect that the recent trend of expanding the liability net much further will slow or begin to reverse itself. But until then, I think this is an issue companies need to keep in mind as they structure their global operations.

Please email the interviewee at ckass@proskauer.com with questions about this interview.