Over the past decade it has become easier for claimants within the EU to bring damages actions seeking compensation for loss suffered because of cartel or other anticompetitive conduct. A successful claim requires, inter alia, an assessment of whether and to what extent the harm has been "passed-on" by those who paid the affected price (direct purchasers) to their own customers (indirect purchasers) by way of corresponding price increases. The job of estimating pass‐on falls to national courts of EU Member States and is a challenging one.

To illustrate the task, let's assume that the court has established that three suppliers were involved in a cartel and that, as a result, a customer was charged an inflated price. The question whether the customer suffered any loss depends on whether it "passed-on" the inflation to its own end-customers. Also, the extent to which those end-customers suffered any loss depends on whether there was any such "pass-on".

It is a technical analysis that is important for damages cases brought across all EU Member States. Last year the European Commission consulted stakeholders on Draft Guidelines to help courts assess pass-on (see our insights here). Taking into account views presented by stakeholders, the EC has now issued Guidelines for courts dealing with the issue of pass-on in competition cases.

Although the Guidelines are non-binding, courts are expected to apply them as "best practice". Parties need, therefore, to take them into account when contemplating the use of pass-on as a "sword" in bringing claims as well as a "shield" in their defence.

Damages claims and pass-on

Anyone can claim full compensation for loss suffered due to an infringement of EU competition rules before an appropriate national court. The harm can have been caused by a business at any level of the supply chain (e.g. supplier, manufacturer, distributor). It is important for courts to be able to assess where the harm was caused, who has suffered loss as a result of the harm, and whether and to what extent that loss was passed on down the supply chain and/or to ultimate consumers.

The Guidelines

The Guidelines focus on overcharges in the context of cartels, but they also provide useful guidance for damages actions related to other competition law infringements such as vertical restraints and abuse of dominance. The Guidelines must be read together with the EC's Practical Guide on Quantifying Harm.

The Guidelines deal with (i) the relevant legal context, (ii) the economic theory of passing-on, (iii) quantification of passing-on related price effects, and (iv) volume effects. The key points are mentioned below.

Legal context: Cartelised overcharges generally result in inflated prices (actual harm) and lower sales (loss of profit). Courts are required to determine at which level of supply these types of harm occur. The Guidelines invite courts, where appropriate, to make use of their powers to estimate the share of overcharge and to order the disclosure of evidence. The Guidelines also confirm that courts should not excessively rely on the legal presumptions set out in the Antitrust Damages Directive. In case of parallel proceedings, they ought to avoid conflicting rulings leading to either over-compensation or under-compensation by staying proceedings, declining jurisdiction, joining several claims or deploying other procedural measures.

Economic theory of passing on: Courts should familiarise themselves with the economic theory of passing-on. This will help them to better assess the value and credibility of the evidence as well as the passing-on effects. Courts should particularly consider that:

  1. variable costs affected by the overcharge are more likely to be passed on than fixed costs,
  2. increased prices normally result in decreased demand,
  3. intense competition generally prevents one purchaser affected by the overcharge to pass it on, and
  4. there might be other relevant elements, such as price regulation.

However, the Guidelines also state that economic theory should only serve as one of several relevant factors and must be assessed in light of the available factual evidence.

The quantification of passing-on related price effects: Courts may apply different methods to estimate the share of the inflated price that was passed-on (actual harm). The most common method is to compare the price comprising the cartelised overcharge with the price set on a 'comparator market'. This might be the same market before or after the infringement, a different geographic area, or a different product market. In any event, courts need to take account of differences between the market affected by the cartel and the comparator market. They may also supplement this comparator-based method with the assessment of other evidence, such as internal documents or witness statements.

Volume effects: In principle, estimating the passing-on related price effects should go hand in hand with estimating the volume of reduced sales because of increased prices (loss of profit). This requires the courts to assess the change in sales volumes due to increased prices and the margin absent the infringement. The Guidelines recognise that this assessment is challenging. They point courts to comparator-based methods and methods evaluating the link between price increases and the relevant demand ("elasticity approach"). Courts are also invited to complement these methods with other evidence, such as internal documents.

Ensuring a sound and balanced regime

The Guidelines provide a much-needed handbook for courts and parties. Linklaters welcomes certain clarifications which help to facilitate a sound and balanced regime for damages claims (see our consultation Response). The following points are worth highlighting:

  • Complex market structures and supply chains can make it difficult to determine the passing-on effects. Courts need to properly assess these effects in each case based on the facts and economic analyses. The Guidelines recognise this level of complexity and encourage courts to take account of all relevant factors rather than applying a simplistic approach.
  • Legal presumptions are a valuable fall-back position in estimating passing-on effects but should not be an end in themselves. The Guidelines acknowledge that the evidence is the starting point of the assessment. Courts should apply presumptions only as the last resort and in a coherent manner to avoid conflicting rulings leading to over-compensation or under-compensation.
  • Courts should apply empirical methods that are scientifically robust, appropriate for the case and based to the widest extent possible on available data. The Guidelines highlight the importance of carefully evaluating any assumptions made against the available factual evidence. Contrary to the original draft, the Guidelines renounce the recommendation to consider the costs when deciding on the method to estimate the passing-on effects.

Any shortcomings?

The far-reaching consequences of the passing-on evaluation and the number of unknowns warrant a higher standard of proof. Unfortunately, the Guidelines seem to relax this standard by ascribing undue importance to qualitative evidence, such as internal documents or witness statements, which may not reflect the commercial reality. While such pieces of evidence might provide useful indications on passing-on effects, they should not take precedence over robust economic analysis nor should they replace it.

As there is little precedent on the quantification of volume effects, one can expect this to keep triggering substantial debate and uncertainty in the coming years, especially in the context of claims lodged by direct purchasers.

Originally published 10 July 2019

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.