Originally published in Competition Law Insight, July 2008
This is the second of a two-part article on the European Commission's recent white paper. This instalment deals with the following train of thought: if the passing-on defence is allowed, the principle of effective compensation requires that indirect purchasers are:
- entitled to claim damages for loss suffered due to a
cartelist's prohibited behaviour; and
- financially capable of initiating a damages action, which
in turn requires that there is a large enough loss to justify
bringing a claim.
If this is not the case, the cartelist will get away with not compensating the loss caused by its anticompetitive behaviour at all, which is clearly an undesirable outcome from a public policy perspective. This is particularly the case because such a situation would lead to a decrease in deterrence. In the authors' opinion, it would be more acceptable to overcompensate the direct purchaser (thereby ensuring a deterrent effect) rather than have a situation where the existence of the passing-on defence – coupled with indirect purchasers' unwillingness or inability to seek damages – would lead to the cartelist not being liable for compensation and the resultant decrease in deterrence. It does not stand to reason that the cartelist should benefit from a lack of private enforcement due to structural obstacles at the indirect purchaser level.
The authors believe that three principles flow from this situation:
- First, the passing-on defence, if it is available at all,
should not be unduly easy to invoke. The cartelist should
bear the full burden of proving the pass-on of loss further
down the supply chain.
- Secondly, if the passing-on defence is made available,
indirect purchasers must be entitled to claim damages for
loss caused by the cartelist's prohibited
behaviour.
- Thirdly, if it appears likely that indirect purchasers
will not be in a position to claim damages, there must either
be a possibility of launching a collective damages action or
the passing-on defence must not be available in such
circumstances. In the latter case, the authors refer to the
German tort law concept of Vorteilsausgleichung as a possible
model.
Passing-on defence / indirect purchaser compensation
Objectives of private enforcement
Private enforcement has two basics aims: full compensation and deterrence. The European Commission refers to full compensation as the first and foremost guiding principle of the white paper. The Commission's proposals recall European Court of Justice case law (in particular, the Courage v Crehan and Manfredi cases) that are authority for the proposition that damages should be available to any injured person who can show a sufficient causal link with the infringement.
In relation to deterrence, the white paper notes that beneficial effects will not necessarily be created directly but rather inherently, so that a better functioning compensation culture will force cartelists to be liable for the costs caused by their illegal actions. However, the authors would argue that this is not necessarily the case, particularly when the availability or otherwise of the passing-on defence is considered. However, if cartelists can invoke the passing-on defence, in the authors' opinion this necessarily leads to a decrease in the deterrent effect, because (particularly in industries where costs are likely to be passed through further down the supply chain) cartelists will successfully be able to resist claims for damages brought against them by direct purchasers.
One might argue that, with reference to the compensatory principle, this is an acceptable outcome. After all, why should direct purchasers be compensated when they have suffered no loss? The white paper refers to this argument when it justifies the availability of the passing-on defence, given the danger of "undue multiple compensation" in the event that the defence is not available. Undue multiple compensation would result from both direct and indirect purchasers claiming damages for the overcharge, although, in the event the costs have been passed through, only the indirect purchasers would have suffered loss. Therefore, the direct purchasers would benefit from unjust enrichment, as the white paper points out.
Appropriate balance between encouraging private enforcement and ensuring sufficient deterrence
The compensatory principle which flows from the Courage v Crehan / Manfredi case law is the main reason for the European Commission's view that defendants should be entitled to invoke the passing-on defence against a claim for compensation of the overcharge.
If it is the case, then, that a cartelist can use the passing-on defence to resist direct purchaser claims in the event that the excessive prices have been passed on (and the burden of proof rests on the cartelist to do so), private enforcement will only fulfil its twin objectives of full compensation and deterrent effect if the system ensures that those entities to whom the excessive prices have been passed through – ie the indirect purchasers – have a proper means of redress.
However, the white paper also identifies a significant potential flaw in this regard. Indirect purchasers further downstream (in particular, final consumers) have considerable difficulties providing evidence both concerning the cartel infringement and the extent of the overcharge. There is often a particular risk that these indirect purchasers are therefore unable to recover compensation for losses incurred due to anticompetitive behaviour.
The recent experience of Which?, the UK consumer protection organisation, attempting to claim damages on behalf of consumers who bought overpriced football replica kits a number of years ago, is testament to the difficulties of proof and evidence that can arise if small, numerous and very diversified indirect purchasers seek damages. Therefore, in combination with the availability of a passing-on defence for the cartelist (which may lead to unjust enrichment in and of itself), difficulties for indirect purchasers to be compensated for cartel overcharges would lead to the collapse of any significant deterrent effect. This cannot be a desirable outcome from a public policy perspective.
The white paper acknowledges this danger, and proposes two solutions: first, it proposes that indirect purchasers' evidentiary burden should be lessened by being able to rely on a rebuttable presumption that the illegal overcharge was passed on to the indirect purchasers in their entirety. Secondly, it proposes two complementary options concerning collective redress. First, it is suggested that representative actions could be brought by "qualified entities" such as consumer associations, state bodies or trade associations. Secondly, the white paper proposes the introduction of collective opt-in damages actions.
Exclusion of passing-on defence in appropriate cases
There is, however, a "third way" of dealing with the conundrum of how to make sure that the deterrent effect of private enforcement is not lost in the event that small, numerous and very diversified indirect purchasers are for some reason unable to recover the overcharge in compensation. This is not to allow cartelists to rely on the passing-on defence at all in such circumstances. In German law, the cartelist is only allowed to claim that the damage in dispute was passed on or was outweighed by other benefits if:
- the cartelist can provide full and detailed evidence of
the alleged pass-on of the overcharge; and
- this would not lead to an unjustified benefit of the
cartelist (ie its retaining the proceeds of prohibited
behaviour because there is nobody who will recover it).
This principle is known as Vorteilsausgleichung. It is a general tort law concept and does not only apply in competition damages cases but in any case where compensation is sought for tortious actions.
Before the seventh amendment of the German Act against Restraints of Competition (ARC) came into force, German courts had taken a conflicting line on whether the passing-on defence was available under German law or not. In the light of these conflicting decisions, the seventh amendment clarified that a cartelist could only avail itself of a passing-on defence in very limited circumstances. The newly-added second sentence to section 33(3) ARC provides: "If a product or a service has been purchased at an excessive price, the damage is not excluded because the goods or services have been resold". However, the explanatory memorandum to the ARC clarifies that any calculation of damages must be based on the Vorteilsausgleichung principle.
The principle provides for two key changes to the damages procedure: first, the burden of proving the alleged loss is reversed (ie from the normal situation where the entity claiming the loss is put to proof) and it becomes the cartelist's duty to establish that the purchaser of the goods or services in question reduced its loss by passing the overcharge on further down the supply chain. Secondly, and importantly, even if the cartelist is able to prove the passing on of the alleged loss, the passing-on defence is not available if it would lead to an unjustified benefit for the cartelist. This would most commonly be the case if the indirect purchasers are small, numerous and very diversified, and there was therefore a risk that they would not seek damages at all.
The reason that German law has approached the matter in this manner is that it is considered preferable to overcompensate purchasers than to protect the villain of the piece, namely the cartelist. After all, it is the latter that has committed the breach of competition law. Therefore, regardless of which category of purchaser (ie direct or indirect) is compensated for losses arising from such a breach, even if it results in overcompensation, that seems preferable to a situation where the cartelist is unjustly enriched because the passing-on defence precludes direct purchasers from claiming damages and indirect purchasers (particularly final consumers) may have the problems set out above to gain compensation.
It is fair to say that the lack of class actions under German competition law is likely to have played a part in this rule, and that the white paper does provide, as noted above, for two types of collective actions which would make an EU equivalent to the Vorteilsausgleichung principle a less pressing matter. However, it appears to the authors that there is nevertheless a strong argument, at least until the representative actions brought by "qualified entities" and collective opt-in damages actions are up and running, to incorporate the German rule into the package of measures that will presumably result from the current white paper consultation. The result would (and in the authors' opinion should) be that cartelists should not be able to avail themselves of the passingon defence in the event that the indirect purchasers are unable or unwilling to claim compensation for the loss incurred by the illegal overcharge.
Conclusion
In this article, the authors have sought to demonstrate the close connection between the availability of the passing-on defence and the resulting requirement to have a system in place that effectively provides for compensation even of small, numerous and very diversified indirect purchasers. In the event that one concept is available but the other is not, it is the authors' view that the system of private enforcement is severely undermined by unfairness and asymmetry. In order to avoid this scenario, the authors support the introduction of an EU equivalent to the German concept of Vorteilsausgleichung unless and until the possibility of collective actions is introduced across the EU.
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