Amid feverish speculation about an impending penalty Google could face in the Android case, it's time to dispel the widely held belief that the EU just conjures its fines out of thin air for dramatic political effect.

The process of setting a competition fine is definitely a malleable and mysterious work of alchemy, but it's not (total) hocus-pocus.

In fact, it all starts with a rigorous mathematical formula.

I saw the whole process firsthand as an intern in 2008 in the chief economist’s team of the EU’s competition department. I was asked to calculate fines for one of the biggest cartels the European Commission ever pursued: the now infamous car glass case.

There was an Excel document, showing a formula. I was given the draft decision, with all the information required to fill in the cells and produce a number. That basic amount for the fine accounted for the size of the business, how serious the infringement was and how long it lasted. People at DG Competition say that this magic formula still exists.

Even the professionals find the fine points of this adjustment calculation to be a mystery.

That's where the hard science ends.

All I remember now is that my sums were miles from the amount that the companies eventually end up paying.

This is business as usual.

The 10 percent red herring

The reason for the big disparity between my number and the final outcome leads us to the dark art of "adjustment."

Adjustment takes into account circumstances that would call for an increase or decrease of the fine. In theory, the levels of a fine can even reflect a company's inability to pay. It must be remembered that the overall goal is to ensure competition in the market, which would not be served by a company being fined into bankruptcy.

Even the professionals find the fine points of this adjustment calculation to be a mystery.

“It’s not always clear how the Commission comes up with the figure it comes up with,” said Marixenia Davilla, a competition lawyer at Quinn Emanuel in Brussels.

So why don't the lawyers just wait for the Commission to produce its number? The truth is that the legal eagles are under pressure from their clients to calculate a hypothetical number. Companies want to steel themselves for trouble by booking potential penalties into their accounts.

More often than not, the companies have been scared by huge numbers appearing in the press based on highly misleading theoretical ceilings for a fine. Newspapers love to cite the fact that the technical maximum level of a fine is 10 percent of the previous year's revenue.

But the big antitrust penalties don't get anywhere near that.

Google's €2.4 billion fine last year was only 3 percent of the previous year's sales. Intel's €1.06 billion fine in 2009 was only 3.8 percent of revenue. Qualcomm's €997 million fine this year was still just under 5 percent.

The headline 10 percent figure is not much of a yardstick for cartels, either. As shown in the European Commission’s statistics, fines imposed on cartels represent less than 5 percent of the global turnover in more than 80 percent of cases.

(In cartels, the basic amount also includes a fixed additional sum that companies always pay when they are involved in cartels, and which is optional in other infringements. This "entry fee" is meant to strengthen the deterrent effect.)



The adjustment bureau

The starting place for calculating and adjusting the fines is the EU guidelines of 2006.

In their biblical tome of Competition Law, Richard Whish and David Bailey contend that the Commission's guidelines have a “wide margin of appreciation” in using aggravating or mitigating factors to increase or lower the amount of the fine.

This means the EU can factor in all sorts of variables to “adjust” (up or down) the fines. This depends, for instance, on whether the companies are repeat offenders, or whether they cooperate.

This explains why companies always publish a press release announcing that they will fully cooperate with the European Commission when storm clouds appear. Cooperation nudges the fine down.

Companies have to be careful about booking provisions for potential fines.

On the other hand, companies and lawyers frequently accuse the Commission of trying to fatten up headline figures and set records. After all, case handlers want to build up their own credentials as enforcers for career progression.

From 2009, Intel's €1.06 billion fine was the number to beat. It was not outdone until the Google decision last year.

Handle with care

Companies have to be careful about booking provisions for potential fines.

One Commission official observed that these numbers are sometimes seen as attempted leverage on the part of the companies to try to haggle down the final figure. By booking a low figure, companies are suggesting that is what they should be fined. That can be something of a red flag to hawks in DG COMP.

The cartel of truckmakers, which picked up a massive €3.8 billion fine from Brussels in 2016, shows how hard it is to read the mind of the Commission.

Congratulations to Daimler, which provisioned €1 billion. The fine it had to pay was €1.009 billion. Almost spot on.

Scania didn't read the signals so well and provisioned for €397 million. The ultimate fine it paid was more than twice that: €880 million.



And if all the massaging the numbers down doesn't work? In that case, the Commission also has guidelines for what happens if you need financial relief immediately after the imposition of the penalty.

The war that never ends

Once a company is fined, it pays immediately, and the EU budget gets a boost. But that doesn't mean it's game over. There can be appeals, and the General Court will decide whether the Commission decision stands.

Even then, that might not be the end. Last year, the European Court of Justice decided Intel was entitled to a retrial over its appeal against its €1.06 billion fine.

Increasingly, the other danger is that the fine may only be the beginning of your problems.

The truck cartel, for example, opens the door to follow-on damages claim from haulage companies who reckon that they have been tricked for years.

The struggle to avoid paying millions of euros to unhappy customers looks set to last for many years to come.

Thibault Larger is a competition reporter for POLITICO.

This article is part of POLITICO’s new coverage of competition, antitrust and state aid issues, Competition Pro. This coverage includes the Fair Play newsletter every Monday morning. Email pro@politico.eu to request a complimentary trial.