UK: Damages Actions

Last Updated: 9 June 2008
Article by Stephen Kon and Dr. Gordon Christian

This article was originally published in Competition Law Insight, 3 June 2008.

The state of private enforcement of competition law in the EU has been under the spotlight ever since the Ashurst Report concluded in 2004 that the area was characterised by "total underdevelopment" and an "astonishing diversity" in the approaches taken by different member states. Although few people thought that it was either necessary or desirable to go as far as the United States has done in favouring private over public enforcement, the Ashurst Report did provide an impetus for the European Commission to analyse how the embryonic state of private enforcement in the EU could be accelerated.

In late 2005, the Commission published a green paper on damages actions that floated a number of ideas on how the problems associated with successfully claiming damages for breaches of EC competition law could be tackled. A consultation exercise was run the following spring, and an expert report was commissioned under the auspices of the Centre for European Policy Studies to evaluate the extent to which the private enforcement area had developed since the Ashurst Report.

After having prepared a detailed regulatory impact assessment and a staff working paper, the European Commission published the long-awaited white paper on damages actions on 2 April 2008.

General points about the white paper

The European Commission is clearly concerned that the private enforcement landscape in Europe has not moved on significantly since publication of its green paper in 2005. As Competition Commissioner Neelie Kroes said in one of her first speeches after publication of the white paper: "While we work hard for consumer interests in public enforcement, gaps and flaws in our legal system mean victims of competition law infringements are foregoing not just millions, but billions in compensation."

However, the European Commission is clearly also aware that it is simply not feasible in a realistic timeframe (or indeed necessary) to harmonise national procedural rules of 27 member states to bring about a more effective private enforcement culture in the EU. Therefore, as a point of principle, the white paper aims to establish a minimum level of protection for parties who have suffered loss as a result of anticompetitive practices and who wish to bring a damages action. This in turn does not appear to preclude member states from imposing stricter or more extensive measures in regard to particular issues than the relevant option suggested in the white paper.

The remainder of this article analyses the key parts of the European Commission's white paper proposals, namely:

  1. standing, in particular collective redress;

  2. access to evidence;

  3. damages / the passing-on defence; and

  4. damages / leniency interplay.

Standing / collective redress

The European Court of Justice's Manfredi judgment in 2006 confirmed that "anyone" who suffered loss as a result of anticompetitive practices could bring a damages action. In the white paper, the European Commission points out that this judgment therefore clearly also deals with the question of standing for indirect purchasers in the competition law context. The reason why it is important that indirect purchasers can also be compensated is that direct purchasers may well attempt to pass on at least a proportion of the overcharge further down the supply chain.

However, it has been a long-standing problem that indirect purchasers may, individually at least, not have suffered a loss large enough to make it worthwhile (given the costs, risks and effort involved in any litigation) to claim damages.

The Commission has therefore set out two complementary options concerning collective redress. First, the European Commission suggests representative actions that would be brought by "qualified entities". The European Commission has in mind entities that are eminently suited to such tasks, such as consumer associations, state bodies and (to cater for aggregation of damages claims by small and medium-sized enterprises) trade associations. The white paper contains the suggestion that such bodies should be either officially designated as an entity capable of taking representative action permanently or on an ad hoc basis for a particular case.

There seems to be clear merit in consumer associations being certified permanently as entitled to take representative actions. Indeed, the UK already has a similar system in place for "specified bodies" bringing actions on behalf of consumers under section 47B of the Competition Act 1998. Interestingly, however, Neelie Kroes noted in a recent speech that "the [representative action] mandate must not be given to an uncontrolled litigation vehicle set up by lawyers who may be pursuing primarily their own financial interests". It is not difficult to imagine that an organisation such as Cartel Damage Claims (CDC) in Belgium – or US plaintiff law firms – will apply to be certified for representative actions. It will be interesting to see how the relevant member states deal with this, particularly as the Commission has gone to great lengths to avoid any suggestions that it is seeking to introduce a USstyle litigation culture in Europe.

Secondly, the white paper recommends the introduction of the opt-in collective action. A senior European Commission official recently commented at a white paper conference that Which?'s damages actions on behalf of consumers in the replica football kits case showed the pitfalls if further members of an identifiable class of victims could not join the damages action at a later stage. The official went on to say that the European Commission would probably provide for a mechanism to remedy this perceived shortcoming.

Access to evidence

A second long-standing problem in private enforcement is how to enable the victim of anticompetitive conduct to access the evidence needed (in the absence of relying on a follow-on damages action where the competition authority's decision that there has been an infringement is proof of liability). Evidence will usually be held only by the infringer or certain third parties, and hence greater availability of evidence concerning anticompetitive conduct would significantly improve the private enforcement landscape in the EU.

In the white paper the European Commission has tried to strike a delicate balance between providing victims of anticompetitive behaviour with sufficient access to evidence to make their case, while being careful not to import the unduly onerous disclosure regime from the US.

Although the devil will clearly be in the detail on this point, the European Commission has made what appears to be an eminently sensible suggestion that, on the basis of harmonised minimum standards across Europe, a claimant can apply to a national court for an inter partes disclosure order under certain conditions. First, the claimant must present the court with plausible grounds for assuming that the claimant has been the victim of anticompetitive behaviour, but that the claimant cannot prove this without the evidence being sought under the disclosure order. Secondly, the claimant must not go on a fishing expedition for documents but must specify "sufficiently precise" categories of evidence to be disclosed. Thirdly, the requested disclosure must relate to relevant documents and be necessary and proportionate.

It is easy to imagine that, particularly in relation to longrunning cartels where the evidence covers a number of years, the categories of evidence being sought, and indeed their relevance as well as the necessity and proportionality of disclosure, could become a key battleground in damages litigation. In this regard, it will be particularly important for national courts to take a consistent line as far as possible across Europe.

Damages / passing on defence

The headline point on damages is that the Commission decided that, in private enforcement in Europe, the objective of compensation should outweigh the objective of deterrence (unlike in the US). The white paper therefore sets out that victims of anticompetitive behaviour should be compensated for the full loss suffered, including actual loss, loss of profit and interest (as confirmed by the European Court of Justice in Manfredi). The green paper had floated the possibility of double damages. This notion has now been rejected on the basis that it is the principle of compensation, not deterrence, which is common to the legal values and traditions of member states.

The white paper has also unequivocally stated that the passing-on defence should be available to infringers in the event that claimants have passed on the overcharge further down the supply chain. The European Commission justifies this approach with possible unjust enrichment of the purchaser and possible multiple damages claims against the infringer (ie from both direct and indirect purchasers). Furthermore, in order to avoid the problem of indirect purchasers (particularly more remote indirect purchasers) being unable to claim compensation due to the difficulties of proving the passing-on of overcharges, the European Commission suggests that indirect purchasers can rely on a rebuttable presumption that an overcharge is passed on in its entirety. The European Commission's proposal on the passing-on defence is a measured response consistent with existing jurisprudence in a very complex area. It remains to be seen to what extent the European Commission's good intentions will translate effectively into practice.

Damages / leniency interplay

The European Commission is acutely aware that the twin objectives of a strong private enforcement regime and an effective EC leniency regime are not easy to accommodate side by side. Similarly to the access to evidence issues, the European Commission needs to tread a fine line between two potentially competing interests, and its proposed solution is interesting.

First, predictably and in line with current practice, the Commission proposes to protect all corporate statements by leniency applicants (regardless of the success or otherwise of the application). Secondly, it attempts to dangle the carrot of limited liability in damages in front of leniency applicants to ensure that leniency applications do not become wholly unattractive due to the risks posed by resulting damages actions. Specifically, the European Commission suggests that a successful immunity applicant should only be liable in damages to its direct and indirect contractual partners. Although the European Commission accepts that the proposal requires further thought, it is an interesting idea that does appear to strike a reasonably appropriate balance between the twin objectives set out above.

Conclusion

The European Commission's white paper package is a wellresearched and comprehensive set of documents that sets out a number of helpful options that, if taken forward, are likely to improve the conditions in which victims of anticompetitive conduct can seek redress across Europe.

The Commission is very keen to hear from as many stakeholders and interested parties as possible during the consultation period that runs until 15 July 2008. While being careful not to prejudge the outcome of that consultation, Competition Commissioner Neelie Kroes has been quoted as saying that specific proposals may emanate from the consultation by as early as the end of this year.

Given the importance of the issues raised by the white paper both for the business community and for their professional advisers, a lively debate can be expected in the months ahead, with the prospect of some significant reforms in the pipeline that should transform the private enforcement landscape in Europe in the foreseeable future.

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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