Resume: In this decision of the Paris Court of Appeal (CA Paris, 18 June 2020, n°19/08826), on referral from the Court of Cassation, the Court has to determine the amount of the penalty imposed on two companies, one of which is the subsidiary of the other, convicted for cartel according.
In a previous decision of the Court of Cassation, the basis for the fine had been calculated without considering a subsidiary of L’Oréal, because the latter had not been convicted for cartel. The Court of Appeals once again takes the opposite position. The financial penalty, resulting from the infringement, was pronounced jointly and severally between the companies, with the subsidiary benefiting from a 23% reduction due to its low participation in the cartel.
To quote this paper: M. PAPANIAN, “The calculation of a financial penalty for companies of the same group, convicted for cartel according by the Paris Court of Appeal”, Competition Forum – French Insights, 2021, n° 0019, https://competition-forum.com.
I. The facts and the decision
The Court of Cassation (on March 27, 2019) overturned the decision of the Court of Appeal insofar as it imposed a financial penalty of 189,494,000 euros on L’Oréal S.A., with Lascad being held jointly and severally liable for the payment of this sum in the amount of 40,784,000 euros.
The company l’Oréal, acting in its personal capacity and taking over the rights of the company Lascad following a merger-absorption operation, has consequently brought an action before the Court for annulment or reversal of practices implemented in the hygiene and body care products sector by the French Competition Authority.
The question then arises as to how to determine the amount of the penalty imposed on these two companies.
The L’Oréal group is the market leader with three distinct societies: L’Oréal S.A., its subsidiary Gemey Maybelline Garnier, and Lascad. Several companies, including L’Oréal and Lascad, have infringed the provisions of Article 81(1) of the EC Treaty (now Article 101(1) TFEU) and Article L420-& of the French Commercial Code. L’Oréal and its subsidiary, Lascad, were sanctioned by the French Competition Authority (ADLC) (1) for having participated in the only cartel on the market for hygiene and body care products by exchanging sensitive information on their commercial policies and the course of their negotiations with the mass retail chains. This exchange led to an artificially high negotiated price level, which was passed on to consumers, and allowed the participants to maintain for their own benefit to the detriment of consumers and the tacit equilibrium that existed under the Galland law (2).
Following an appeal of the ADLC’s decision, the Court of Appeal overturned the decision and applied a 23% deduction for individual participation. Regarding the method of individualizing the sanction, it requests that the reduction rate be set at 23% for both companies in view of their smaller shareholding and that there will be no increase due to the economic power of the L’Oréal group. The decision pronounced liable for payment L’Oréal, for 198 494 000 euros, and Lascad jointly and severally liable of 45 551 000 euros.
The Court of Cassation ruled that the Court of Appeal had violated Article L.464-2 of the French Commercial Code by considering the value of sales made by GMG in determining the amount of the fine, even though it had not been notified of any grievance.
The amount of the financial penalty imposed, was determined based on “double net” and not “triple net” (3) sales and included the value of GMG’s sales in the basis for calculating the penalty. This criterion makes it possible to determine the penalties regarding the company’s contribution to the harm done to the economy, without distinguishing between companies according to their bargaining power.
• On the scope of the value of sales
The penalty should not reflect the real economic value of the sales made by the undertaking in question, but the economic scale of the infringement committed. It should be deduced from all these elements that the “double net” sales figure, derived from French accounting standards, constitutes a suitable reference for arriving at a proportionate penalty with respect to L’Oréal and Lascad and appropriately reflects the economic scale of the infringement and their relative weight.
• On the scope of the reference turnover
Paragraph 23 of the Sanctions Release states that the basis for the financial penalty is a proportion of the value of sales made by each “undertaking or organization concerned” of products or services related to the infringement. From these elements, it is not appropriate, in this context, to exclude from the basis for the penalty the sales made by GMG, a general partnership, a subsidiary of the L’Oréal group attached to L’Oréal (S.A.), if they are related to the cartel. Other sales related to the infringement must be considered.
• On the periods used to calculate the value of sales
No year can be considered as a full year of participation in the practice, so the average value of sales for the years 2003 to 2006 should have been used.
• On the circumstances specific to each company
– Concerning the reduction for the individual participation of L’Oréal and Lascad in the practices
L’Oréal maintains that the 14% reduction applied by the Authority does not take sufficient account of its participation and of Lascad, in violation of the principle of proportionality. Given that Lascad only participated in three meetings of the “Team PCP Circle” and only one meeting of the “Circle of Friends”, the principles of individualization and proportionality of the penalty justify the reversal of the contested decision and the application of a 23% reduction to Lascad.
– Concerning the increase due to the economic power of the group
To ensure that the financial penalty is both dissuasive and proportionate, points 47 and 49 of the statement of penalties allow the Authority to adjust the basic amount upwards or downwards to take account of other objective factors specific to the situation of the undertaking or organization concerned.
It follows from the foregoing that the Authority, without disregarding the principle of proportionality, increased the basic amount of the fine imposed on L’Oreal and Lascad by 15% to consider the economic power of the L’Oréal group and the characteristics of the infringement in question.
• Calculation of the penalty
Lascad was merged into L’Oréal S.A. and will therefore be held jointly and severally liable for payment of the fine.
To conclude, the basic amount of the financial penalty for Lascad must be reduced by 23% due to its lesser participation in the practices.
The financial penalty imposed on L’Oréal and Lascad for the infringement has been imposed jointly and severally, up to the limit of Lascad’s participation.
As a result, L’Oréal S.A., personally and in its capacity as successor in title to Lascad, was ordered to pay a fine of 189,494,000 euros, including 40,784,000 euros for the payment that Lascad could be required to make.
II. The opposition of the Court of Appeal against the Court of Cassation
In this judgment, it is necessary to highlight the considering of the value of the sales of a company of the same group having committed the infringement, whereas the latter is not prosecuted (4).
This judgment follows a record fine of the French Competition Authority of approximately 1 billion euros for a dozen suppliers in the retail sector. The fine of €189,494,000 remains one of the ten highest fines imposed by the Authority on a single company, with the subsidiary being jointly and severally liable for the payment of €45,551,000 of the fine.
The Court of Cassation rejected the decision of the Court of Appeal based on Article L464-2 of the French Commercial Code, which had considered the value of sales made by its subsidiary GMG in calculating the basis for the fine imposed on L’Oréal S.A., even though the latter was not being prosecuted.
L’Oréal would like the Court of Appeal to confirm the judgment of the Court of Cassation, and therefore not to take these values into account, thus reducing the amount of the fine imposed. This position is supported by the Minister of the Economy and the Public Prosecutor.
However, the Authority opposes this exclusion and asserts that the term “company” must be understood in an economic and not a legal sense. Consequently, it is not necessary to demonstrate that a subsidiary of a group participated in the practices as a perpetrator to include in the scope of the value of sales the turnover realized in the sector concerned by the infringement.
The Court of Appeal confirmed this view and dismissed L’Oréal’s claims.
The decision recalls that the basis of the sanction must reflect the economic importance of the infringement as well as the relative weight of the company involved in the infringement. The Paris Court of Appeal noted that L’Oréal SA, the parent company of the L’Oréal group, had reached an agreement with the other companies on the sale of Gemey’s products and that it was therefore not logical to exclude the sales made by Gemey.
The issue here is the quantum of the fine imposed on L’Oréal SA, especially considering Gemey’s market share in the hygiene products sector of 10%.
This economic approach to the notion of undertaking is in line with that of the French Competition Authority or the Commission, which in a Bananas judgment before the Court of First Instance and then on referral to the Court of Justice (5), affirmed that the Commission was entitled to include the turnover of a company not covered by the objections in the basis of the fine as long as this turnover came from the sale of the products that had been the subject of the infringement.
On the other hand, the Court of Appeal went against the decision of the Court of Cassation and such resistance was even more surprising as the cassation did not occur because of a lack of reasons or a lack of legal basis, demonstrating that the rule of law had been accurately applied, but because of a violation of the law (Article L. 464-2 of the French Commercial Code) leaving little room for control or assessment of the facts. L’Oréal subsequently appealed against this second judgment.
(1) Décision 14-D-19 du 18 Décembre 2014, Autorité de la Concurrence
(2) The purpose of the Galland law was to maintain the loyalty and the balance in the commercial relationship between large retail chains and both their suppliers and small retailers.
(3) The “double net” revenue results from the application of French accounting standards, the sales value reflects the price as charged to the customer, without deducting costs or other charges that are built into the selling price of the product.
The “triple net” corresponds to the price actually paid by the distributor, after discount on purchase invoice, deferred rebates and commercial cooperation.
(4) « Amende et groupe de sociétés : la cour d’appel de Paris s’oppose à la Cour de cassation dans l’affaire des Produits d’hygiène et d’entretien et persiste à inclure la valeur des ventes d’une filiale non poursuivie dans l’assiette de la sanction infligée à sa société mère », Alexandre APEL, Revue Lamy de la concurrence, Nº 98, 1er octobre 2020
(5) CJEU, March 19, 2015 aff C-286/13 P