In June 2006, the European Commission (EC) issued new fines guidelines for breaches of the EC competition rules, which will replace the old fines guidelines adopted in 1998. The 2006 guidelines will apply to all cases where the EC issues a Statement of Objections after 1 September, 2006.

They represent a further step in the EC's ongoing attempts to strengthen enforcement of the competition rules through deterrent fines. The 2006 guidelines are likely to lead to higher fines imposed on companies than in the past, but fines will remain subject to the statutory maximum limit of 10% of a company's total worldwide turnover in the year preceding the infringement.

The 2006 guidelines introduce a new, refined methodology for determining the level of fines and work as follows.

The EC first determines the 'basic amount' of the fine. Under the 1998 guidelines, the EC sets this by reference to the gravity of the infringement (i.e. 'very serious', 'serious' or 'minor'), which applied a minimum flat rate of €20m (£13.7m) for very serious violations, regardless of the size of the market affected. The EC does away with such a classification under the new guidelines. Instead, the starting point is up to 30% of the annual value of European Economic Area (EEA) sales of the products or services subject to the infringement (although there will be an adjustment mechanism where the markets are wider in scope than the EEA).

The EC will then multiply this 'basic amount' by the number of years the violation lasted. Under the 1998 guidelines, the multiplier was only 10%. The result is that long-duration cartels will pay far higher fines under the new rules.

An additional amount, called an 'entry fee', of 15%-25% of the value of sales may subsequently be added to the basic amount in cartel cases (and other types of infringement). This entry fee is intended to act as a further deterrent, especially to cartels.

Once the 'basic amount' is determined, like the earlier 1998 guidelines, uplifts and discounts are given for aggravating (i.e. obstruction, instigation, coercion or recidivism) and mitigating circumstances (termination of infringement, lack of intent, non-implementation, cooperation outside the scope of the 2002 Leniency Notice, authorisation or encouragement by the state).

However, some important changes have been introduced in relation to 'repeat offenders', the 'state action defence' and 'additional deterrence factors'.

The 2006 guidelines widen the scope of the notion of 'repeat offenders' and allow up to 100% uplift for each established prior infringement of a similar nature. Furthermore, the EC will consider prior national competition authority decisions as evidence of recidivism.

This contrasts with the EC's practice under the 1998 guidelines, which previously tended to impose a 50% increase on repeat offenders, regardless of the number of prior infringements they were involved in.

Where the anti-competitive conduct has been authorised or encouraged by public authorities or legislation, the EC now explicitly recognises that this will constitute a mitigating circumstance.

Deterrent uplifts are also possible in the case of large companies with particularly large turnovers beyond the sales or services to which the infringement relates or where it is possible to estimate the improper gains made as a result of the infringement.

If the fine exceeds the legal maximum of 10% of the total turnover of the company in the preceding business year after applying this fining policy, the fine will be reduced to the 10% limit. Unfortunately, the 2006 guidelines say nothing as to what happens if the company has no turnover in the preceding year.

The EC will then apply its 2002 Leniency Notice (currently being revised), which sets out the conditions for full immunity or a reduction in the fine. The 2002 Leniency Notice will not be affected by the new guidelines.

Finally, the EC may take account of the undertaking's inability to pay the fine; for example, where the imposition of the fine would irretrievably prejudice the economic viability of the company, forcing it into bankruptcy unless a reduction was granted. However, these cases are likely to be rare.

The 2006 guidelines attempt to add greater transparency in setting the fines and reduce the number of cases in which small firms are excessively penalised. They link fines to sales, the duration of the offence and the offender's gains. This is intended to ensure that any penalty imposed is commensurate with the size of the economic harm done to the market and is, therefore, more likely to reflect the overcharge arising from a cartel.

This contrasts with the arbitrary amounts under the 1998 guidelines, which, for example, imposed unfair flat-rate fines on companies whose conduct had affected markets of very little value. There is also a greater focus on deterrence, which can result in the imposition of higher fines, increasing the incentives for companies to whistle-blow on others and cooperate with the EC under its leniency programme.

These are all moves in the right direction. Yet the 2006 guidelines are only guidelines and the EC can depart from them if the case warrants it. Indeed, the EC still enjoys a wide margin of discretion under its new policy. Little or no guidance is provided as to how the EC will set fines within the ranges for the basic amount (0%-30%), the entry fee (15%-25%) or recidivism (0%-100%).

This broad discretion risks disproportionate and higher fines being imposed. Indeed, it is likely that more fines will hit the 10% turnover limit as a result of the harsher treatment given to repeat infringements and the introduction of a specific company size-related increase for deterrence.

The 2006 guidelines significantly raise the stakes for antitrust violations and particularly for companies that have previously been sanctioned by national or EC competition authorities and hence risk being branded recidivists under the new rules. It emphasises once again the importance of effective compliance programmes within the business.

Companies should ensure that their competition policies are up to date, offer refresher training for employees and consider auditing high-risk areas of the business for competition law infringements.

Bill Batchelor is a partner and Marta Garcia an associate at Baker & McKenzie in London.