Article by Dr. Bertold Bär-Bouyssière, LL.M., and Mr Mike Pollen, Global Head of Marine
New EU Competition Law
Shipping has historically been sheltered from the full force of EU competition law. For the past 20 years, EU Block Exemption Regulation 4056/86 has allowed liner conferences to fix prices and regulate capacity. Some shipping companies were fined for fixing prices outside liner conferences. Most non-conference shipping activities completely avoided the reach of competition law. All this however is set to change.
On 25 September 2006, the EU Council agreed that the block exemption will no longer apply and that price fixing and capacity regulation in liner conferences will not be permitted as of 1 October 2008. Liner operators have thus been given a transitional period of two years in which to fall into line with the new regime. However, EU antitrust rules will apply immediately to tramp shipping and cabotage - no formal transition period has been granted.
The EU Block Exemption Regulation 823/2000 on Consortia continues to apply, but chiefly only covers containerised shipping. All other types of cargo shipping are governed by the "general rules" of EU competition law. "Naked" price fixing and capacity regulation in the shipping industry will be prohibited by the EU antitrust laws, in the same way as is already the case in other industry sectors.
The effect of the Competitiveness Council's decision is effectively to put the entire maritime cargo sector on the antitrust radar. Carriers need to start preparing now in order to avoid unnecessary antitrust risks.
Previously, there was limited risk of sanctions in the absence of a genuine law enforcement policy (few exceptions confirm the rule). From now on however, the slightest overstepping of the boundaries, however accidental, may trigger dawn raids, investigations and sanctions including huge fines and even imprisonment of company personnel.
Failure to Comply
Antitrust infringers risk fines of up to 10% of global aggregated turnover. In the past, this maximum cap was seldom reached. However, the EU in 2006 has just published fining guidelines that can lead to fines four times higher than was previously the situation. For example, one case from 2001 saw the infringing company fined almost €500 million. Today, the fine for the same infringement is likely to be much higher. Antitrust fines at this level can put at risk the finances of a company, even leading to insolvency.
In addition to fines, infringers face other potential sanctions, including:
- private damages claims (including class actions) not only in the US, but increasingly also in the EU;
- the company’s reputation becoming tarnished in the eyes of its customers;
- incurring vast legal fees, and a potential three-year investigation (not including any appeals) which will be a drain on financial and personnel resources; and
- in some jurisdictions, employees, officers and directors also risk criminal sanctions including imprisonment.
These risks may materialize not only where companies fix prices "on routes" to and from Europe, but also in relation to routes outside the EU but where they have an appreciable effect in Europe.
Competition Law Issues Faced by Shipping Companies with Cooperative Projects
Consortia for shipping (chiefly container trades) continue to be allowed under certain circumstances, but with the new focus on policy and law enforcement, full compliance now matters like never before. Apart from the permitted and limited consortia for liner shipping, bulk carriers are in the dark with regard to strategic "projects" such as joining a pool, consortium or alliance while complying with competition law. This uncertainty will undoubtedly last for some time. The EU has promised appropriate guidance in particular for pools for late 2007, but such guidelines will be general and are unlikely to answer specific questions on particular projects. Liner and bulk operators must ensure that any existing or new form of strategic cooperation in consortia, pools, alliances and other cooperative arrangements fully complies with the applicable rules.
There is no longer a notification procedure in which an antitrust rubber stamp can be obtained from the Commission. Companies must make their own compliance arrangements and will have to satisfy themselves that they will stand up to potential attack. The Commission’s guidelines will give some help with self-assessment, but only the company itself can carry out the self-assessment.
Self-assessment of strategic projects can be managed, but it is a process which needs to be carefully and diligently undertaken. Companies must start now to analyze where they stand on each market. Specialized outside counsel combining experience in shipping and competition law can assist in the self-assessment, provided such counsel is involved at an early stage. The first step therefore is to review current operations, especially if companies belong to a pool, joint venture, liner conference or other cooperative arrangement.
The Other ''Real Problems''
Whatever the upcoming guidelines will say, we already know that "naked" price fixing and capacity regulation (i.e. outside a possibly justifying context such as a synergy-creating pool) are as a matter of principle no longer permitted. Indirect or deemed equivalents of such activities are also prohibited, but they are much harder to identify and guard against. This affects not only strategic decision-making at the top level of organisations, but everybody involved in day-to-day operations. While the principle of ''no price fixing'' may be simple to understand, the practice is not. Antitrust rules have applied for 50 years in other sectors of the economy, yet companies still manage to fall into difficulties.
Antitrust liabilities can put a company at serious risk, and infringements can therefore no longer be considered "a cost of doing business". Compliance is seen as the preferred line of action for many of the world's boardrooms. The problem does not manifest itself solely in the boardroom however - moving down organisations, personnel such as sales representatives need to be wary of infringing the rules to meet targets and short term results.
Others in the organisation may unintentionally infringe antitrust rules. They need to be made aware of where the boundaries of permissible behaviour lie. Indeed, the boundaries themselves are not clear. This is all the more the case in an industry where lawful co-operation between competitors is the rule. Any informal "chat" between employees of competitors can lead to the exchange of commercially sensitive information, which may be punished.
Companies need to make sure that all their employees are made aware of the rules, and more importantly that they comply with them. Compliance training is the best medium to help achieve this objective.
The Benefits Of A Compliance Program
Compliance training helps a company significantly to reduce the risk of antitrust liability, provided it is well-designed for the company's own specific needs and implemented rigorously.
- Primarily, conducting compliance training helps the employees to know and avoid legal pitfalls. Whereas the training may require some investment in terms of company time and money, this is nothing compared to a multi-million Euro fine.
- Secondly, a compliance program helps detect improper conduct. Only after detection can the company have an opportunity to correct it. If the worst happens, by disclosing unlawful conduct that is not yet known to the authorities a company may obtain full immunity from fines. However, only the first to inform obtains full immunity; the latter get only a reduction of fines, if any. It is imperative to act before a competitor, an employee, or indeed a customer blows the whistle.
- Thirdly, if things still go wrong, the company can show to the authorities that compliance is regarded as important within the organisation, and not something to be flouted.
How Is A Compliance Program Set Up?
A good compliance programme is always custom-tailored to the specific needs of each company. It must match the organisational matrix of the company to be effective. Within the shipping industry, not one company is exactly the same as any other. The programme must be adapted to the structure and mode of operations of the company concerned. A standard compliance program typically involves the following phases:
- A basic high level written compliance policy is adopted at board or CEO level, and communicated to staff.
- Basic antitrust training is given through seminars in the company for selected employees whose work might involve a risk of non-compliance. The sessions are also used for the purpose of identifying specific compliance risks and exploring ways in which work procedures can be modified to reduce or remove these risks.
- Simple guidelines are produced for specific high risk functions.
- Monitoring and reporting lines are established within the management structure to ensure that staff do not operate within a management vacuum for competition compliance purposes.
- Employees carry out electronic compliance training through an external or company website. This electronic training is combined with a testing and certification mechanism. The company can see how its employees performed, and the employees in turn understand that the company has played its part by investing in training.
- The company's HR policy is amended to reflect the adoption of the compliance policy and training.
- An internal audit is carried out at suitable intervals, to check whether the initial risk assessment still holds good and whether the training is being followed in practice.
Sophisticated operators have started preparing now to avoid the risks brought on by this sudden change of climate. Compliance is neither rocket science nor a mystery. It just requires thoroughness.
This article first appeared in the March 2007 edition of Maritime Risk International
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.