In the event of a violation of competition rules (for example, cartelization, i.e., collusion with competitors), the fine can reach 10% of the company’s entire group’s turnover, which can be in the billions. The question is whether the CEO can be required to reimburse the fine imposed on the company?
In June 2010, the European Commission imposed a fine of 71.5 million euros on the long-established company Villeroy&Boch, which produces various ceramics, for cartelization. The fine was upheld by the Court of Justice of the European Union (CJEU) in its decision in November 2017.
In order to somehow escape the fine, Villeroy&Boch filed a damages lawsuit in Germany against four of its former executives after the CJEU ruling, claiming more than 70 million euros in damages and legal costs incurred in connection with the cartel proceedings.
The German court of first instance dismissed the claim on the grounds that the action was time-barred. However, it stressed that it did not find it to be well-founded on the merits. According to the court’s reasoning,
fines imposed for infringements of EU competition law are aimed at companies and not at individual natural persons within them.
If the company could pass on this fine to its executives, or more precisely to the liability insurers insuring the executives, by citing liability for damages, this would be contrary to the objectives of EU competition law. Villeroy&Boch has appealed the decision, and the case is continuing.
Almost in parallel with the German case, a Dutch court ruled in September 2020 that a managing director is liable for damages to the company he leads for a fine imposed for a cartel violation.
The court emphasized in its ruling that managers are expected to exercise a higher degree of care, so they should be aware that participation in competition law violations is sanctioned by the law with high fines.
The court therefore ordered the managing director to pay 13 million euros in damages. However, the ruling is not final, and the second-instance proceedings are currently ongoing.
Liability of senior executives in Hungarian law Under Hungarian law, the liability of a managing director is determined by whether the company employs him in an employment relationship or a contract relationship.
In the case of an employment relationship, the managing director qualifies as a so-called “managerial employee” and, according to the Labor Code, is fully liable for any damage caused intentionally or negligently.
Damages that were not foreseeable at the time of the damage, or that were caused by the employer’s culpable conduct, or that resulted from the employer’s failure to comply with its obligation to mitigate the damage, shall not be compensated.
In the case of a legal relationship of entrustment, the issue shall be judged according to the rules of the Civil Code (Ptk.), according to which the manager must compensate for the damage caused to the enterprise in the course of his management activities.
He is only exempted from this if he proves that the damage was caused by (i) circumstances beyond his control, (ii) circumstances that were unforeseeable at the time of the performance of the management activity, and (iii) circumstances that could not have been avoided or prevented.
Hungarian court practice – In general, it can be said that in Hungary, too, it often happens that companies file a lawsuit for damages against the manager due to a fine imposed on them. This most often happens in connection with a tax fine, if the tax office finds that the company has violated some tax rule and therefore applies a fine, but it has also happened in the case of a fine that the company had to pay due to undeclared employees. Among the court decisions made public anonymously, we can find many such cases.
One lawsuit for damages due to a competition law fine similar to the above case has been made public so far. In this case, the Hungarian Competition Authority imposed a fine on the company because it had agreed on its prices and their increases with its competitors. The price agreements were made personally by the company’s managing director at an industry association meeting. The company first tried to fight the fine through legal means, and after losing the proceedings, it was forced to pay the fine. The company then sued the managing director for damages equal to the amount of the fine it had paid.
The damages case against the managing director, after first and second instance, also reached the Curia, where it was finally confirmed that the managing director was indeed liable for the fine and that the company must therefore pay compensation.
The Curia found that the unlawful conduct of the managing director was manifested in the fact that he had informed his competitors about the planned price increases at the company he managed, their amount and date. In doing so, the managing director acted in violation of the competition law, on the basis of which the competition authority had rightfully imposed a fine on the undertaking. And the managing director could indeed be held liable for the fact that the undertaking ultimately had to pay this fine. Since the undertaking suffered damage in the form of the fine and the managing director was responsible for this, the managing director owed the undertaking compensation corresponding to the amount of the fine.
The case was adjudicated on the basis of the old Civil Code and Act IV of 2006 on Business Associations, but the Curia should have reached the same conclusion on the basis of the new Civil Code that replaced them, and it will reach the same conclusion in a similar future case.