[By Rahul Taneja]
The author is a student of Hidayatullah National Law University.
Introduction
‘Parent company liability’ refers to the liability of the parent or the holding company for illegal acts of its subsidiary. In the context of the Indian competition law, such illegal acts can be the act of an anti-competitive agreement, abuse of dominance or the formation of a cartel. However, when examining jurisdictions with advanced antitrust laws, it is observed that this issue has been a source of contention for both researchers and industry professionals. The author’s goal is to assess the jurisprudence in India, contrast it with established precedents in other jurisdictions, and offer a path forward from this inevitable dilemma that the regulating body must confront itself with. The doctrine of parent company liability in India is still at a nascent stage and there is a dearth of case laws surrounding this jurisprudence.
The developing jurisprudence in India
Owing to its nascency, the Competition Commission of India (“CCI”) has faced comparatively lesser cases involving the claims of parent company liability under the Competition Act of 2002. The definition of an enterprise under the Competition Act, 2002 under Section 2(h) read with the proviso clause to section 27 gives the prima facie impression that the statute has empowered the tribunal to embark on a fact-based finding to impute liability upon the parent company in case of its contribution to an anti-competitive agreement or an abuse of dominance proceeding.
It is notable that the CCI is yet to come up with a straitjacket formula for assessing the liability of the parent company, there is also a dearth of cases surrounding this particular jurisprudence. However, it is not appropriate to say that this question has no relevance to contemporary competition jurisprudence. Recently, in the Re: Updated Terms of Service and Privacy Policy for WhatsApp Users (“WhatsApp Privacy Policy case”), Facebook (parent entity) was attached as an appropriate party to the antitrust proceeding initiated against WhatsApp based on its 2021 Privacy Policy in the prima facie order under Section 26(1) of the Competition Act. The CCI commented that since Facebook was a direct beneficiary of the policy, it is a proper party to the proceedings along with WhatsApp. This stand taken by the tribunal comes with a lot of accompanying disastrous consequences, fixation of liability only on this sole ground would lead to every company under the sun being held accountable for the subsidiary’s actions. This stand is all the more problematic in cases where the subsidiary’s economic activities are independent of interference from the parent company
Apart from the WhatsApp case, the question of parent company liability has come up before in the case of Kapoor Glass v. Schott Glass India Private Limited. In this case, the Director General (“DG”) recommended that the fine for anti-competitive discounts offered by the subsidiary must also lie upon the holding company, the CCI refused to pass any order to this effect and limited the liability to the contravening subsidiary without delving on to this point in detail.
The European Experience
In the European Union, competition law is governed by the provisions of the Treaty of the European Union (“TFEU”). As per Article 101 of the aforementioned treaty, liability for infringements falls upon ‘undertakings’, which is a startling contrast from other jurisdictions wherein liability is imposed upon legal entities. The concept of an undertaking is distinct from the concept of a legal entity. The former focuses more on the economic functions whereas, the latter focuses more on the legal or corporate status. This means that multiple legal entities can form part of the same economic undertaking. This is also known as the ‘single economic entity doctrine’, it entails that multiple entities form part of the same undertaking wherein a parent can be held liable for the infringing actions of the subsidiary and according to recent decisions of the court, even vice versa.
The landmark decision where liability was imputed upon the parent company is the case of Akzo Nobel NV v Commission, wherein, the ECJ affixed joint and several liability upon Akzo Nobel NV for the illegal price-fixing agreements of its subsidiary. In this case, the court read the concept of a single economic entity viś-a-viś what is now known as the ‘doctrine of decisive influence’ and reasoned that the parent and subsidiary form part of the same economic undertaking wherein the former exercises considerable influence over the latter’s decisions and thus the onus of liability can be affixed upon the holding company without proving the direct liability of the same. The doctrine of decisive influence works on a rebuttable presumption that the two entities forming part of a single undertaking are liable and it is upon the entities to adduce any additional economic or legal evidence to prove the contrary.
The doctrine of decisive influence, first articulated in the Akzo Nobel Case, has since been applied in numerous subsequent cases in the EU as well as in other jurisdictions such as Singapore. The European Court of Justice’s (ECJ) strict reading of the presumption has resulted in the culpability of the parent firm in the majority of cases, despite the corporations presenting extensive evidence to avoid liability.
In the Arkema case of ECJ, the parent company argued that it is a purely financial holding that does not intervene in the subsidiary’s commercial policies; similarly, in the Legris Industries case, an argument was advanced that the subsidiary company was only a small part of the conglomerate and that Legris had no say in its commercial policies. The ECJ flatly rejected the arguments in both cases. This archaic practice of the ECJ has made it seem like an almost quasi-irrebuttable presumption.
US Jurisprudence
As opposed to the EU wherein parent company liability is the norm, the general rule in the United States is that the parent company will not be held liable for the actions of the subsidiary, this difference is all the more surprising because of the normally converging nature of the substantive laws in both jurisdictions. One of the reasons might be that the Sherman Act, 1890, which is the governing law for antitrust enforcement refers to ‘persons’ and not ‘undertakings’ as the entity upon which penalties can be imposed. The law in the United States affixes liability rarely and only if, the parent is directly involved in the subsidiary’s conduct or it meets the law’s stringent requirement for piercing the corporate veil.
The landmark case surrounding parent company liability in the US is United States v Bestfoods, wherein, the principle of corporate separateness was reaffirmed and the parent company was relieved of liability. In Reading Intern., Inc. v. Oaktree Capital Management LLC it was made clear that the parent company can only be held liable if it has direct involvement in the contravening action and it exerts substantial influence over the subsidiary.
When a litigant can demonstrate that the parent has exploited the corporate form to perpetuate wrongful activities, piercing the corporate veil allows the litigant to reach the parent’s assets. It is upon the court of the individual states to pierce the veil. Generally, the courts in the concerned states have shown reluctance in piercing and have held that the principle of corporate separateness can only be defied in cases where there is an active involvement of the parent in the actions of the subsidiary or wherein the actions can directly be affixed upon the parent company.
In conclusion, the single economic entity doctrine in the EU entails two things –
- The inability of two parties within a single economic entity to enter into an anti-competitive agreement.
- Liability of the Holding company for the actions of the subsidiary
In the USA, the latter interpretation is relatively unknown.
Policy Justifications for parent company liability
The proponents of the doctrine of parent company liability justify it on the grounds of solving the judgement proof problem and the doctrine of personal responsibility. The former emanates from the tortious concept of vicarious liability, which means that the brunt of paying the penalties imposed by the statute should lie upon the employer as the employee was acting under his influence and that he has limited means insufficient to pay the fines. The latter states that the liability should lie upon the one under whose influence the contravening act was done.
Conclusion
The genesis of parent company liability lies in the ‘Single Economic Entity’ doctrine which usually entails that –
- Two companies forming part of the same legal entity cannot enter into an anti-competitive agreement.
- Liability of the parent company for infringing actions of the subsidiary.
For the ECJ, both these interpretations form two sides of the same coin while the interpretation in India and the USA revolves around the former. Needless to say, the approach of the CCI regarding the doctrine has been haphazard, to say the least. The approach of the CCI in the WhatsApp privacy policy case with regards to the attraction of liability on the part of Facebook on the sole ground that it is a direct beneficiary is a sign of the evolution of law in the wrong direction which demands fixation.
The CCI should come up with a uniform formula for the fixation of liability enumerating the activities that will contribute to the attraction of liability onto a parent company. The chequered jurisprudence needs to be fixed or it will result in the decisions being constantly overturned by the Apex Court. While evolving the aforementioned uniform formula, the tribunal may take lessons from other jurisdictions, however, the author is of the view that the archaic provisions of the European Union are perhaps not the right direction for a developing economy such as India. The liability should be fixed upon the parent company in the rarest of the rare cases only when the parent company is in complete or substantial control of the subsidiary’s anti-competitive actions. This control can be determined after taking note of a variety of factors such as market influence, shareholding, common board members and the overall legal character of the two entities.