Competition Law: can a subsidiary face liability for the parent company’s competition law infringement and how this judgment might affect Malaysia
Competition law although still in its infancy in Malaysia has slowly seen increasing enforcement. Established in June 2011, the Malaysian Competition Commission (MyCC) has the objective and purpose to preserve healthy market competition between enterprises through the Competition Act 2010 (Act). The Act takes inspiration from the mature markets of the UK and EU. This means the development of competition law in those markets are relevant to us.
Now I know what you are thinking, most large corporations in Malaysia providing essential goods and services still enjoy oligopolistic or even monopolistic status in our economy and this is not an unfair assessment. However, we must remember that MyCC requires experience and stronger laws for it to show its potential, not to mention political mandate. But that topic is for another conversation.
As it stands, we can monitor competition law globally to see how it will or should be adopted in Malaysia. With that I have recently come across a very interesting case decided by the Court of Justice of the European Union (CJEU) in case C-882/19, Sumal SL v Mercedes Benz Trucks España SL. In short, the CJEU held that in certain conditions a subsidiary can be held liable for the damages caused by the infringement for which the parent company has been fined.
Factual summary
In a 2016 decision, the European Commission (EC) found that Daimler AG had infringed a provision of European competition law prohibiting cartels (Article 101 TFEU)(1) by entering into several agreements with other European manufacturers to increase truck prices between January 1997 and January 2011.
During the cartel period, the Spanish transport company Sumal SL acquired two trucks from Mercedes Benz España (MBE), a subsidiary of the German Daimler AG. Sumal brought an antitrust action against MBE in the Spanish courts but it was dismissed. Sumal then appealed against the decision, and the Spanish court subsequently referred the matter to the CJEU.
The judgment of the CJEU
The CJEU clearly defined the general conditions under which damages for breach of European competition law by a parent company may be claimed against a subsidiary. Essentially, the claimant must prove that when considering:
The links that unite the parent and the subsidiary such as the economic, organizational and legal links; and
The link between the subsidiary’s economic activity and the subject matter of the parent company’s infringement.
Therefore, the parent company and its subsidiary form a single economic entity.
In a nutshell, where a parent company (controller) and its subsidiary (controlled) are so linked that the subsidiary’s actions are virtually dictated by the parent company, there can be assignability of liability. The subsidiary cannot challenge the existence of the anticompetitive conduct even though the parent company was the one who acted unlawfully first.
Impact
As we can see this is a highly controversial question on the liability for antitrust damages. Due to the doctrine of corporate legal personality each incorporated company (be it 50 different subsidiaries under a parent company) is a separate entity and responsible over its own affairs.
The CJEU took a progressive approach by applying the notion of single economic entity in the field of private enforcement. Usually in a competition law infringement case, the competition commission (this is where MyCC comes in) will take an action against the company for its unlawful conduct but here we see private enforcement. It confirms that where both parent company and subsidiary act as one undertaking on the market, liability not only applies in the ‘bottom-up’, but also in the ‘top-down’ direction.
Consequently, it is not the mere existence of control, decisive influence or participation in the infringement that triggers such liability, but the mere fact that these subsidiaries for part of a single economic entity with the infringer.
Therefore, the argument that principle of autonomy of legal persons under corporate law would prevent the attribution of responsibility from one entity to another, jointly and severally, within the same undertaking (piercing the corporate veil), is finally rejected.
How or can this apply in Malaysian jurisdiction?
It is worth noting that article 101 TFEU is similar to section 4 of our Competition Act where it prohibits anti-competitive agreements (vertical or horizontal agreements) that have the object or effect of significantly preventing, restricting, or distorting competition in any market for goods or services. In our borders, section 64 of the Act governs private enforcement.
Having said that, our law on private enforcement is not this progressive however it can be. The single economic entity doctrine is applied in Malaysian competition although it still follows the conservative approach of control. MyCC in Malaysian Airline System Berhad/AirAsia Berhad and AirAsia X Sdn Bhd (2), adopted the EU case laws of single economic entity and held that the applicable test is the test of control of which it is to be determined whether the parties to the Collaborative Agreement are independent in their decision-making or whether one is able to decisively influence over the other with the result that the latter does not enjoy real autonomy in determining its commercial policy on the market.
The courts and MyCC has shown in the past that it does not shy away form adopting good competition law from other jurisdictions. However, it does beg the question of whether progressive pushes in law are always good, commercial realities and local policy.
Take for example certain telecommunication industry, if you are a company that requires data centres or cloud services for your business and you scout around to find the best fit for your company. You find that all data storage and cloud service prices have oddly the same pricing and it doesn’t really matter which one you choose. Only reliability and customer service will factor into your decision. And then you find out there is a cartel for these services, no wonder there is not much variance in pricing.
You find out that MyCC has already taken action against the parent companies, but your contract was with one of their subsidiaries. Is it justified that you take an action against this subsidiary for damages? It looks pretty straight forward from this perspective right? But what if you are the CEO of this subsidiary and you are merely following a policy set up your parent company without any knowledge of this cartel agreement. It would not be straightforward anymore.
This CJEU case was only decided in mid-2021 and I do hope that it reaches our shores soon. It would be interesting to see how our court tackle this issue. I think that it would give a good image on the health of competition law in Malaysia in that we are keeping in pace with the latest developments of the law world wide. International corporations will be able to conduct their affairs with more certainty.
Suffice to say, a new era of the single economic entity doctrine to both public and private enforcement of competition law is about to start. This will undoubtedly lead to controversy with fascinating litigation processes where companies will fight over the existence of these links. In my opinion competition law in this region will see a surge and it will be wise to prepare to ride this wave.
Reference:
Article 101 of the Treaty of the Functioning of the European Union
Case No. MyCC.0001.2012
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