April 2013 Dawn Raid Update. Dawn raids continue to be an important investigatory tool for the Commission particularly in relation to cartels. There have been over 20 dawn raids conducted by the Commission in the last 4 years. The recent changes to the European Commission s guidance on dawn raid procedure, and the recent significant cases that have upheld the Commission s powers to impose significant penalties for obstruction, mean that it is more important than ever for companies to ensure they have up-to-date compliance procedures and revised dawn raid manuals for their staff. Much of the evidence seized by the Commission during a dawn raid is increasingly in the form of electronic data. IT personnel and appropriately dealing with the Commission s requirements in relation to data handling during the raid have therefore become critically important in the company s interactions with the Commission during the raid, and staff in these roles must be made aware of the nature of their obligation to cooperate with the Commission as soon as the inspectors arrive on-premises. The revised Commission dawn raid guidance, issued on 18 March 2013, reflects some of the Commission s evolving working practices in this area, and deals with important topics such as the right to a lawyer, the scope of the Commission s search, cooperation obligations, forensic imaging of hard drives, interviews with employees and breaking of seals. The key point for all companies is that now is the time to update internal procedures in preparation for a potential raid. These should reflect current thinking and rights of defence need to be carefully balanced against the Commission s strict approach to co-operation and the risk of high fines for obstruction (in principle up to 1% of worldwide turnover or an uplift in any infringement fine levied). Contents Practical tips... 1 Right to a lawyer... 2 Scope of the search... 3 Obligations of the company to assist in the inspection. 3 Forensic imaging of hard drives and interviews with employees... 3 Obligation to ensure seals are not broken... 4 Challenging Commission procedure... 5 References... 6 Practical tips > Do not prevent the Commission inspectors from entering and beginning the basic formalities to allow time for external counsel to arrive. Explain the need for representation but begin the process by giving entry, providing site maps of offices etc. and if requested, taking officials to relevant offices to ensure documents are not being tampered with. Issue 1 1
> Ensure a note is made on the record of any objection to a Commission search conducted without a national judicial warrant, but be aware that refusal to submit to the search risks heavy penalties. > Make the IT environment and all electronic storage media, in addition to hardcopy books and records, available to the inspectors for their search but request a lawyer to be present when imaged documents are reviewed (whether on-site or at the Commission s offices in Brussels). > IT staff must comply promptly with the instructions of the Commission, which may include blocking access to email, disconnecting computers from the network, removing and reinstalling hard drives from computers and providing administrator access rights -support. > Be aware that the Commission can take forensic images of hard drives for continued inspection at the company s premises or at its own premises in Brussels. The legality of this practice has yet to be adjudicated by the European Courts. > If the Commission seals the premises or a particular room then it is worth adding additional measures such as physical closures (locking the doors, if possible, or applying metal plates) and overnight security to ensure that the seal is not accidentally broken. Right to a lawyer The guidance makes clear that the presence of a lawyer is not a legal condition for the validity of the inspection; therefore the Commission has the right to proceed with its search prior to the arrival of counsel. The Commission will accept only a short delay pending consultation of the lawyer. This language has been retained from the previous version of the guidance and the natural question that emerged was: what is a short delay? The answer was provided in the recent Koninklijke Wegenbouw Stevin ( KWS ) case, in which the Commission increased KWS fine by 10% for having denied inspectors entry to the company s premises for 47 minutes while waiting for external counsel to arrive. In September 2012, the General Court held that while a company can ask that external counsel be present during the inspection, the Commission officials should at least be given access to the premises to serve the inspection decision and ensure that crucial evidence is not being destroyed. The 47-minute delay cost KWS 1.7 million. The practical advice for companies is that investigators should be granted entry, provided a meeting room and the basic formalities should be progressed immediately: for example providing a site plan of offices, discussing where documentation is kept and, if requested, taking the investigators to relevant floors to demonstrate documents are not being destroyed. It is important to establish a positive working relationship with the investigators and if these basic issues are addressed the investigators may well be prepared to wait for the arrival of external counsel, particularly if there is no in-house counsel on site. Issue 1 2
Scope of the search The Commission can search not just books and records but also the IT environment, storage media and hardware of the undertaking. This includes laptops, desktops, tablets, mobile phones, CD-ROM, DVD, and USB-keys. They will use built-in, keyword search tools and also their own dedicated software ( Forensic IT tools ) and/or hardware. The revised guidance explains that at the end of the inspection the Commission will cleanse the Forensic IT tools, with the objective of completely removing the data from the storage device in a way that the data cannot be reconstructed by any known technique. The Commission may ask to borrow the hardware of the company (hard-disks, CD-ROMs, DVDs, USBkeys, connection cables, scanners, printers, and so on) but cannot be obliged by the company to use this hardware. Hardware provided by the company will not be cleansed by the Commission. Obligations of the company to assist in the inspection Significant additions to the guidance are in the area of the company s obligations whilst the search is being conducted. The company must cooperate fully and actively with the inspection, which may include making available members of staff to give explanations on the organisation of the undertaking and its IT environment and also to carry out specific tasks to facilitate the inspection such as temporarily blocking individual email accounts, temporarily disconnecting running computers from the network, removing and re-installing hard drives from computers and providing administrator access rights -support. The guidance makes clear that once in place the undertaking must not interfere in any way with these measures. This language reflects the position taken by the Commission in the recent EPH case. In March 2012, the Commission imposed a 2.5 million fine on two Czech power companies for refusal to submit to an inspection. The Commission had requested that access to all relevant email accounts be blocked by setting a password known only to the Commission, but the password to one email account was modified by the company to allow an employee access. In addition, the IT department diverted incoming email traffic intended for certain blocked email accounts so that it was not visible to the inspecting officials. The revised guidance highlights that the onus is on the company to inform the employees affected by the search (including those being investigated and those obliged to assist) to ensure that such breaches do not occur. Forensic imaging of hard drives and interviews with employees The Commission may keep any storage media of the company being examined until the end of the inspection, which may last several days. It may be returned earlier, after a forensic copy of the data under investigation has been made. The making of such copies allows for the continued inspection of the data at the Commission s premises in Brussels. The Commission s procedure is to secure the forensic copy by placing it in a sealed envelope, with a copy given to the company. The company will be invited to attend the opening of the sealed envelope at the Commission s premises, but the new guidance also introduces the possibility that the sealed envelope may be returned to the company unopened. Issue 1 3
The Commission s practice of copying large volumes of electronic documents for review at the Commission s premises can be dangerous for companies on its face it is tempting to minimise disruption on-site by allowing for a shorter inspection, but it potentially allows the Commission to gain access to documents that are irrelevant to the investigation and/or legally privileged. The Commission has also used its powers to ask questions of employees during the dawn raid. Such interviews can similarly stray into areas not covered by the scope of its investigation or could result in self-incriminating statements. The 2009 dawn raids in the Power Cables investigation illustrate the problem. In that case the Commission took a forensic copy of the entire hard drive of an employee of Nexans and also decided to interview a Nexans employee regarding documents found on another employee s computer. Nexans appealed to the General Court on several grounds, one of which was that the Commission had exceeded its powers by taking copies of documents that were not relevant to its investigation as defined by its mandate. Nexans successfully obtained a partial annulment of the Commission s inspection decision in so far as it related to a particular category of electric cables, on the basis that the Commission only had reasonable grounds for suspecting an infringement, such as to justify the inspections, in relation to high voltage underwater and underground electric cables and not other types of electric cables. However, the Court declined to rule on the lawfulness of the copying of the hard drive on the grounds that the challenge was inadmissible at that stage of the procedure. The Court similarly found that the decision to interview a Nexans employee was also not yet reviewable. It held that neither act by the Commission in itself constituted an actionable measure subject to the Court s jurisdiction. The Court found that any challenge to the Commission s conduct must instead be addressed by way of appeal against the Commission s final infringement decision in the cartel case itself. Thus the practical issues of whether the Commission is entitled to take a wholesale copy of large volumes of data for later inspection offpremises and the legality of the Commission s interview remain unresolved. In relation to in-person interviews during the raid, it is important that counsel is present to object to questions going beyond the Commission s mandate and avoid self-incrimination. Where documents are being reviewed on-site, counsel have the opportunity to supervise the search and ensure due care is taken by the Commission to limit the inspection to documents that are relevant to the investigation, within the scope of the inspection decision, and not legally privileged. If the Commission takes large batches of electronic documents back to Brussels for continued inspection, counsel must be present during this review to ensure that the same safeguards are in place. Obligation to ensure seals are not broken Where the Commission decides to seal the business premises and books or records of the company, a record will be made. The revised guidance clarifies the obligation not to tamper with the seal. Previously the guidance required that the company ensure that seals that have been affixed, as well as the immediate environment of the place where they have been affixed (e.g. door, doorframe, cupboard), remain untouched. The revised guidance makes clear that the obligation of the company is to ensure that the seals are not broken until they are removed by the Commission. Issue 1 4
In the E.ON case, the Commission imposed a fine of 38 million for breach of seal when the seal closing off a room containing seized documents overnight was found the next day to be broken. E.ON contested the fine, arguing that there may be alternative explanations for why the seal had broken, including humidity and vibrations from a neighbouring room. On appeal to the European Court of Justice a key point at issue was who bears the burden of proof. In November 2012, the Court held that the Commission bears the burden of proving that the seals had been interfered with, which it had so proven. It is then for the company to demonstrate that it was not at fault, and E.ON had not met this burden. The Court upheld the fine and noted that, although E.ON argued that this was disproportionate, the fine represented only 0.14% of E.ON s annual turnover. As a matter of practice, given the significant sanction applied in E.ON, companies are adding additional security to seals, for example structural closings to doors (such as metal plates) and overnight security teams to ensure seals are not inadvertently broken. Challenging Commission procedure The revised guidance, as with its previous incarnation, is not binding legislation, but is issued for information only. The Commission s methods of enforcing the guidance in the past have included taking account of any obstruction to its inspection as an aggravating factor warranting an uplift of the company s infringement fine (e.g. 10% for KWS) or adopting a decision to fine the company specifically for the obstruction pursuant to Article 23(1) of Regulation 1/2003 (E.ON). Once adopted, these decisions can be challenged via court processes. There is significant difficulty, however, in challenging the Commission s conduct during the dawn raid. It was confirmed in the Colas Est case before the European Court of Human Rights that Article 8 of the European Convention on Human Rights (now Article 7 of the EU Charter of Fundamental Rights), which protects the inviolability of the home, may apply to a company s registered office. It was also found that, in some circumstances, a search by a competition authority, without a prior judicial warrant and without a police officer with judicial investigation powers being present, may infringe Article 8. However, parties denying the Commission entry for lack of a judicial warrant risk uplifts or separate fines for obstruction until this issue is adjudicated on by the Courts (it is currently before the General Court in Deutsche Bahn). Nexans makes clear that actions taken by the Commission pursuant to a lawful decision authorising the inspection can only be challenged once the infringement decision in the cartel case has been adopted. The alternative for a company is to refuse to submit to the inspection, which may involve as little as delaying entry to the premises or, per the revised guidance, not making available the relevant IT staff in a manner satisfactory to the Commission, and to then challenge the likely fine for obstruction, which may be up to 1% of the company s worldwide turnover. It may also lead to an uplift of any fine that the Commission may impose and may prejudice the company s cooperative relationship with the investigating team going forward. If the company chooses to submit to the inspection it should ensure that a statement is entered on the record (e.g. in the minutes at the end of the dawn raid) that its submission to the raid should not be construed as confirmation by the company of the legality of the search. Issue 1 5
The policy reasons for the Commission s strict approach in the context of raids is driven by the importance of the evidence seized to building its case. Unfortunately recent case law supports the Commission s hard-line approach and companies are therefore well advised to ensure their dawn raid guidelines and training appropriately reflect this. References Explanatory note to an authorisation to conduct an inspection in execution of a Commission decision under Article 20(4) of Council Regulation No 1/2003, revised on 18 March 2013. Contacts For further information please contact: Daniela Seeliger (+49) 211 22977 302 daniela.seeliger@linklaters.com Bernd Meyring (+32) 250 50332 bernd.meyring@linklaters.com Anne Wachsmann (+33) 15643 5700 anne.wachsmann@linklaters.com Nicole Kar For immediate assistance The Linklaters Dawn Raid Hotline will put you in immediate, 24/7 contact with specialists with practical experience and training in dawn raids from across all European Member States. (+44) 207 456 4382 nicole.kar@linklaters.com 0044 20 7456 5055 Author: Michelle Chowdhury This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2013 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to www.linklaters.com/regulation for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. One Silk Street London EC2Y 8HQ Telephone (+44) 20 7456 2000 Facsimile (+44) 20 7456 2222 Linklaters.com Issue 1 6