|May 24, 2012|
Previously published on May 2012
On 24 April 2012, the UK government department responsible for business (the Department for Business, Innovation and Skills or BIS) published a consultation document on private actions in competition law. The document proposes a number of measures intended to encourage private competition law actions in the UK without, BIS hopes, opening the floodgates to "vexatious or spurious" litigation. The stated political aims of such reforms, according to the government minister announcing the reforms, are to increase growth "by empowering small businesses to tackle anticompetitive behaviour that is stifling their business" and to "promote fairness by enabling third parties that have suffered loss due to anti-competitive behaviour to obtain redress." These are to be achieved by a series of reforms to make it "easier, simpler and quicker" for private individuals and businesses (particularly small and medium sized companies (SMEs)) to bring a case based on allegations of competition law infringement before the courts, rather than relying on enforcement by a public authority, such as the Office of Fair Trading (OFT).
The four key elements of the proposed reforms are:
- to expand the jurisdiction of the specialist Competition Appeal Tribunal (CAT) to make it easier for competition claims to be brought before it, including by giving it powers to grant 'fast track' injunctions to SMEs to protect them from allegedly anticompetitive behaviour and introducing legislative presumptions concerning the financial impact of cartels;
- to introduce opt-out collective actions for competition law claims;
- to promote alternative dispute resolution (ADR) in competition disputes; and
- various steps to ensure that reforms to encourage private enforcement do not undermine the public enforcement regime, particularly with respect to protecting the leniency regime.
The first two of these proposed reforms are the most far-reaching and will be considered further below.
The role of the CAT
The CAT was given a specific jurisdiction to hear competition law claims by the Enterprise Act 2002. This move built on the CAT's expertise as the specialist appeal body for competition law infringement decisions of the OFT and sectoral regulators. Crucially, however, the CAT was given jurisdiction to hear only follow-on claims - that is, claims relating solely to issues on which a prior finding of infringement has been made by a competition authority. Any standalone actions, where an infringement has not already been found by a competition authority and must therefore be proved by the claimant, must be brought in the High Court (or the Court of Session for Scottish cases). This principle has been applied restrictively in practice, meaning that any claimants wishing to introduce new competition arguments must be heard before the High Court. In addition, claimants wishing to bring a follow-on action before the CAT must generally wait for all appeals against the decision on which the claim is based to be exhausted before lodging a claim (a process that can take six years or more, for EU enforcement cases), whereas a claim can be initiated at the High Court while appeals are ongoing. These twin limitations have meant that the CAT has been less popular as a forum for competition law claims than was originally hoped, despite its clear expertise and enthusiasm for its role. The Government believes that allowing standalone actions to be heard before the CAT will address this.
In addition, BIS is proposing to implement a dormant statutory provision enabling the transfer of competition cases from the High Court to the CAT, to give more flexibility in terms of case allocation. In practice, there is already a degree of flexibility in terms of hearing cases, since all judges of the Chancery Division of the High Court are also able to sit as CAT Chairmen. This measure may lead to more cases being referred to the CAT and the additional flexibility it will gives should be welcomed. It remains to be seen, however, whether the transfer of cases from the High Court will in practice speed up or delay the process, particularly in cases that involve a mix of competition and non-competition issues, since the latter must remain with the High Court.
Fast track routes for SMEs
As noted above, the policy behind the reforms is heavily supportive of SMEs and their role in delivering economic growth. The most radical manifestation of this policy is the proposal to give SMEs a 'fast track' for competition claims before the CAT. Such a procedure would allow the CAT to grant swift interim injunctions, and possibly damages, on the basis of limited pleadings and a hearing lasting a maximum of two days. The current disincentives for bringing claims would be addressed by capping the claimant's liability for the defendant's costs if its claim is unsuccessful to a maximum of £25,000 and by allowing the CAT to waive the usual requirement for a claimant seeking an injunction to undertake to compensate the defendant for costs it suffers as a result of an injunction being granted, if the injunction ultimately proves to have been wrongly awarded.
This particular proposal raises many questions, most of which are not answered by the BIS consultation document. One of the main reasons that standalone competition actions are slow and expensive is it is hard to prove an infringement of competition law. Such difficulties arise both from the lack of evidence of an infringement in many cases (cartels, for example, are by their nature secret) and from the complexity of distinguishing anticompetitive from benign conduct. The latter issue is particularly evident in abuse of dominance claims, which is the category of infringement that BIS appears to be most concerned about, as far as the impact on SMEs is concerned. In such cases, it is necessary to prove both that the defendant is dominant on an economic market and that the conduct it engaged in was abusive. Usually both of these must be demonstrated by reference to extensive economic evidence, in the face of a defendant with the resources and incentives to resist an infringement finding. BIS's proposals will not change the substantive test for anticompetitive conduct and hence not alter this basic reality.
By attempting to use procedural (rather than substantive) rules to tilt the playing field decisively in favour of SME claimants against defendant businesses, these proposals are bound to lead to at least some unmeritorious claims and, through the granting of injunctions on limited evidence, to the prohibition of behaviour that may well be lawful. Although prohibition is intended to be temporary, an injunction is often a prelude to a permanent pre-trial settlement in the claimant's favour, given the immediate and ongoing cost to the defendant's business of the imposition of an injunction and the high cost of a trial. The ability of the CAT to grant injunctive relief will be of particular concern to defendant companies operating in fast-moving markets, since a restriction on their normal business practices, even for six months, could have a significant and lasting effect on their ability to compete with rivals.
Presumption of loss
BIS has rightly identified that a major disincentive for claimants is the need to quantify the loss suffered as a result of anticompetitive conduct. Its response is to propose the introduction by legislation of a rebuttable presumption that a cartel increased prices by a fixed amount of 20%. This presumption could be rebutted by the defendant (or indeed the claimant, if it wished to claim a higher amount), by presenting the necessary evidence. BIS believes that this presumption might particularly encourage follow-on cases, where an infringement has already been found. The introduction of a resumption of loss would represent a major departure from current practice, where the interests of justice require that a claimant bears the burden of proving its losses before it can recover.
Another option to make life easier for claimants would be to limit the ability of defendants to present a 'passing-on defence', under which the claim of a direct purchaser from a cartel member is reduced by the amount by which the purchaser was able to 'pass on' any overcharge to its customers by raising its own prices. The evidential difficulties faced by a claimant in dealing with such a defence are viewed as one further factor that discourages damages actions. Although banning the passing on defence is presented as an option by BIS, it seems relatively unenthusiastic about changing the existing position, which is that such a defence is available before UK courts.
In addition to the general follow-on damages jurisdiction noted above, the Enterprise Act 2002 also gave the CAT specific follow-on jurisdiction to hear so-called 'representative actions'. These can be brought by recognised representative bodies on behalf of consumers seeking compensation for harm arising from a competition law infringement. Crucially, affected consumers must 'opt-in' to any action before they can recover damages. It is not sufficient that they are members of a defined 'class'.
The Government rightly concludes that this regime has failed. There has only been one representative action to date - a settlement between the consumer body Which? and JJB Sports, which saw 130 claimants (fewer than 0.1% of those estimated to be affected) signing up to the action, for which they were reported to have received £20 each. Following this outcome, Which? (which is the only body currently authorised to bring such claims) publicly announced that it would not attempt such a claim again under the current regime.
BIS is now proposing a number of changes to encourage collective actions, namely:
- allowing collective actions to be brought on behalf of businesses as well as consumers;
- allowing collective actions to be brought in both standalone and follow-on cases; and
- allowing collective actions on an opt-out, rather than an opt-in, basis.
An opt-out regime would allow for a representative body to bring a claim on behalf of a defined group of claimants and damages would be calculated by reference to the estimated size of that group, without all the individual claimants needing to be identified. All members of the group would be bound by the final decision, unless they chose to opt out and bring their own claims independently. To avoid some of the perceived drawbacks of the US class action system, BIS proposes that the ability to bring opt-out actions should be given only to bodies which could reasonably be considered as representative of the group, such as trade associations or consumer groups, rather than law firms or third party litigation funders.
BIS also believes that any risks of a US-style litigation culture can be minimised by preserving the loser-pays rule in collective actions, not allowing treble or punitive damages and not allowing contingency fees (where lawyers take a percentage of the fees). Unclaimed funds would, BIS suggested, be given to a charity supporting access to justice and there would be no general 'cy-près' rule. BIS is also suggesting that abuses can be avoided by giving the CAT an active case management role, including deciding whether an opt-out collective approach is merited in any case.
These reform proposals, which are a mixture of incremental improvements and potentially radical leaps, emerged at the tail end of a broader and higher profile consultation over the shape of the public enforcement regime (see previous advisory). Notwithstanding the low key nature of their introduction, if the proposals are implemented in full the impact could well be more far-reaching that the changes to public enforcement that are now being implemented.
A healthy private competition litigation environment represents a welcome complement to enforcement by the state, particularly where public budgets are under pressure and the competition authorities are having to prioritise their resources on a small number of high impact cases. Contrary to the impression given by the BIS document, the UK competition litigation environment is relatively healthy, with significant follow-on claims currently being heard by the CAT and the High Court and competition law arguments increasingly being deployed in dedicated standalone actions and wider civil disputes. The proposed incremental improvements to the current regime should further improve this situation.
Introduction of opt-out collective actions would be a more radical step into the unknown for the UK, although experience from the introduction of opt-out regimes elsewhere in Europe suggests that, so far, they have not let to the much feared 'US style' litigation culture. In the authors' view, only the introduction of the fast track injunction procedure for SMEs threatens to be a real problem for legitimate businesses and it remains to be seen whether the flaws of this proposal will lead to this aspect of the proposed reforms being watered down or dropped during the legislative process.
Interested parties are invited to respond to the consultation by 24 July 2012.