United States: Dawn Raid Derailment—A Cautionary Tale

In Short

The Development: The European Commission ("Commission") issued a preliminary finding that ZSSK, Slovakia's state-owned railway, obstructed a dawn raid ("inspection") and infringed its obligation to comply with inspectors.

Background: The Commission alleges that during a 2016 inspection related to exclusionary conduct, ZSSK may have misled officials as to the location of a laptop and installed a new operating system, which overwrote relevant data.

Looking Ahead: ZSSK faces fines up to 1 percent of its annual revenue. The Commission's finding sends the message that it will not tolerate obstruction of inspections, which are one of the Commission's key investigative tools in uncovering anticompetitive conduct.

The Commission's Powers of Inspection

To enforce EU competition rules, the Commission has authority to conduct unannounced inspections of company records or question personnel on company premises. Given the element of surprise, these inspections are a powerful tool in detecting anticompetitive behavior.

Inspection Powers. The Commission may enter any premises (whether business or private residence), land, or means of transport, and may examine and copy any books or records related to the business, whether in paper or electronic form.

Duty to Comply. Companies must cooperate with Commission inspections and provide all documents relevant to the investigation, including accurate explanations of documents or facts.

Sanctions. Failure to comply with inspection rules, whether intentionally or negligently, may result in a penalty of up to 1 percent of a company's total turnover in the preceding business year. Alternatively (but not cumulatively), the Commission may punish obstruction of an inspection as an aggravating circumstance in fining a company found to have violated EU competition rules.

A Painful Past

The Commission has pursued both above-mentioned sanctions for obstructing a dawn raid.

Direct Approach—Fines for Violating EU Procedural Rules. The ZSSK finding highlights the importance of appropriate IT management during dawn raids and follows a series of cases in which parties obstructed inspections, either carelessly or intentionally, including providing incorrect information, breaking door seals, and withholding email passwords, that resulted in costly consequences for the inspection target:

  • 2014: €2.5 million fine upheld. The EU General Court upheld the Commission's €2.5 million fine on Czech energy company Energetický a průmyslový and its subsidiary for obstructing a dawn raid in 2009.

    Commission officials requested that the company lock the email accounts of key employees to prevent deletion. The Commission later discovered that the company had modified the password of one account to enable employee access. Furthermore, the company diverted incoming emails of certain locked accounts to a server such that the e-mails were not visible to the inspectors. This was the first case in which the Commission fined a company for obstructing IT searches during a dawn raid.
  • 2012: €38 million fine upheld. The EU Court of Justice affirmed the Commission's €38 million fine imposed in 2008 on E.ON Energie for breaking, whether intentionally or negligently, the Commission's seal placed on a door to protect a locked room overnight, which contained documents that the Commission selected for closer examination during its inspection.

    This was the Commission's first fine for breaking a seal and the first time that it imposed a fine for obstructing an inspection by way of a separate decision for violation of procedural rules.
  • 2011: €8 million fine imposed. In another case of a broken seal during an inspection, the Commission imposed lower fines because the implicated company demonstrated immediate and constructive cooperation, and provided information that went beyond its obligations. The company indicated that an employee had unintentionally breached the seal.

Indirect Approach—Aggravating Circumstance in Setting the Fine for EU Antitrust Infringement. The Commission also has penalized obstruction of an inspection as an aggravating circumstance in setting fines for violating EU competition rules.

In the latest example, in 2012 the GCEU affirmed a 10 percent increase (or €1.7 million) in the fine on Koninklijke Wegenbouw Stevin ("KWC"), which refused access to Commission officials until KWC's lawyers arrived approximately 47 minutes later. KWC also temporarily refused access to a company director's office, claiming that the office contained no documents on the relevant product.

Preference for Direct Pursuit of Violations of EU Procedural Rules. Although these examples demonstrate that the Commission has pursued inspection interference as an aggravating circumstance in antitrust cases, the Commission tends to favor standalone procedures for violation of EU procedural rules. This is especially the case when the Commission wants to send a message that companies must play by the rules and/or is uncertain whether the antitrust case will be pursued and lead to any penalties.

Separating procedural inspection violations from breaches of EU antitrust laws accelerates the punishment of procedural violations and increases the deterrent effect. In addition, the Commission enjoys broad discretion in determining the fine because there are no guidelines for setting fines for procedural breaches.

Precedents in EU Member States

EU Member States also seek penalties for the obstruction of inspections. The Slovakian competition authority imposed a fine of €1.6 million in 2015 for failure to properly block the email accounts of selected employees. The Polish competition authority fined Polkomtel €33 million in 2011 for obstruction of an inspection, including for refusing to provide a hard disk containing all e-mail correspondence of various employees for the authority's subsequent analysis. The Spanish competition authority fined Trasmediterránea €2 million for obstructing an inspection by hindering access to information and to senior executives and GRAFOPLAS €161,600 for obstruction following the disappearance of potentially relevant documents during a dawn raid.

A Reminder of Do's and Don'ts

Company management must ensure employee awareness of proper conduct during dawn raids. Some key elements to retain:

  • Do request that officials wait until external counsel but do not refuse access without legal advice first (officials are not required to wait).
  • Do inform all employees that an investigation is taking place and instruct them to cooperate with the investigator, including that they do not delete any e-mails or destroy any documents.
  • Do check if a document requested is within the scope of the investigation and is legally privileged, but do not refuse access to a document without obtaining legal advice first.

Employee training or mock inspections are useful in adapting internal procedures and manuals and ensuring coordination between all concerned employees, including legal and IT teams, as well as corporate compliance officers.

Three Key Takeaways

  1. A dawn raid is a stressful experience. In a surprise inspection, employees who lack proper training may conceal or destroy evidence, intentionally or not, which can lead to additional financial penalties for the company.
  2. This case is a reminder that companies should prepare employees for how to handle a surprise inspection and consider holding "fire drill" exercises with outside counsel.
  3. This case also illustrates a trend within the Commission to pursue procedural violations relating to inspections, and more broadly, to enforce its procedural rules.

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.

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Authors
Charlotte Breuvart
Cecelia Kye
 
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