UK: Commission Proposals to Kick-start Damages Actions in Competition Cases

Last Updated: 2 February 2006
Article by Guy Lougher

The European Commission has taken its first step in encouraging greater private enforcement of competition law. In its recent Green Paper, it highlights the main obstacles to bringing damages actions for breach of EC competition law and explores various options that could be implemented to facilitate successful litigation.

Businesses that breach competition law are already at risk of claims for damages in addition to fines imposed by the authorities. However, a study published in September 2004 found that there have been very few successful damages claims and that the present system is totally undeveloped.

The Commission has concluded that improving the conditions for damages claims would: encourage companies and consumers to obtain redress, thus making EC competition law enforcement more effective; deter businesses from engaging in anticompetitive practices; and provide compensation for affected third parties.

The Commission has suggested various policy options to remove obstacles to successful claims. Key areas for discussion include:-

  • How to alleviate the difficulties faced by claimants attempting to obtain evidence;
  • How to calculate damages, so that they are sufficient to incentivise individuals to bring an action - in this regard, double damages are envisaged for horizontal cartels; and
  • How to encourage groups of consumers to bring a claim, as the damage to an individual customer will rarely outweigh the costs of litigation

The Commission has invited comments on the proposals, to be submitted by 21 April 2006. It will decide on the next steps once the responses have been considered.

Practical implications

The Commission is very keen to encourage greater private enforcement of the EC competition rules and any changes to the system are likely to be in the claimant's favour, thus increasing exposure for potential defendants. Any reforms which remove the barriers that currently hinder actions would make businesses more vulnerable. Coupled with an upturn in infringement proceedings and increased usage of leniency programmes, the threat of a damages claim could become a commercial reality.

Businesses need to be aware that the immunity from fines afforded by leniency programmes does not extend to damages actions. In addition, damages recovered by private parties are not reduced by any fines imposed by the authorities. Therefore, potential liability can be significant.

Conversely, businesses which consider that they have been adversely affected by anti-competitive behaviour should consider whether they have a claim for damages.

Conglomerate effects in EU mergers: GE/Honeywell

The merger of General Electric (GE) and Honeywell was definitively blocked at the end of 2005 when the European Court of First Instance (CFI) upheld the European Commission's 2001 merger prohibition decision. This was a controversial case: the merger involved solely US companies and had been cleared already by the US antitrust authorities (subject to limited conditions).

The Commission welcomed the CFI's decision. The CFI agreed with the Commission that, due to horizontal overlaps between GE and Honeywell, the merger would create or strengthen dominant positions and thus significantly impede effective competition in the markets for jet engines for large regional aircraft, engines for corporate jet aircraft and small marine gas turbines. It was on this basis that the CFI upheld the Commission's decision to block this merger.

At the same time, however, the Commission came in for criticism in relation to its findings on conglomerate effects, concerning the anti-competitive effects of the interaction between the complementary areas of GE's and Honeywell's businesses.

The Commission was concerned that GE could extend its pre-merger dominant position in engines into Honeywell's avionics and non-avionics product markets (e.g. engine starters) through its financial and leasing subsidiaries. According to the CFI, however, it was not enough to show that GE would have the ability to leverage its dominant position in this way. It was also necessary to demonstrate that this was likely to happen and that in the relatively near future it would create a dominant position at least on some of those markets. The CFI concluded that the Commission had failed to provide convincing evidence to this effect.

The potential bundling of GE's and Honeywell's complementary products was also a concern. Whilst this would facilitate discounts for customers who bought bundled products, the Commission took the view that this would foreclose competition - other competitors could not offer a similar bundled product. Again, the CFI considered that no convincing evidence had been presented for this finding. The mere fact that the merged company would have a greater range of products than its competitors was not enough to prove that dominant positions would have been created or strengthened on different markets. The Commission also failed to take into account the disincentives for such behaviour, including the deterrent effect of potentially abusing a dominant position under Article 82 EC.

Practical Implications

This case underlines, for large organisations in particular, that conglomerate effects may be anticompetitive in certain circumstances, but that the standard to be met by the competition authorities in proving this likelihood is very high. The theory of conglomerate effects therefore remains but its application is likely to be relatively limited in future cases, except where very strong evidence can be adduced that such effects are likely to occur.

In brief: recent procedural changes in the UK

  • The Competition Commission is considering introducing a fast-track merger scrutiny process for simpler deals. The CC has experienced a significant increase in its workload, as the OFT now refers about 50 per cent more deals to the CC for detailed merger scrutiny than it did prior to a Court of Appeal ruling in 2004, which lowered the legal test for referral. However, the CC's Chairman has stated that being fast-tracked would not necessarily imply a greater chance of clearance.
  • The OFT has published for consultation its proposed 2006-7 Annual Plan, in which its five priority areas remain unchanged from last year, being consumer credit, healthcare, construction and housing, mass-marketed scams and public procurement. In response to recent criticism by the National Audit Office of its efficiency and effectiveness, the OFT is aiming to improve its casework management (by the introduction of a ‘preliminary investigations unit’ to help it prioritise investigations) and its communications with complainants during cases.
  • Following the recent suspension of its confidential guidance and informal advice procedures under the UK merger control rules, the OFT intends to publish its preliminary thinking on the long-term position on the provision of these services in Spring/Summer 2006. It also intends to embark on a wider review of its procedural guidance for mergers during the year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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