|July 2, 2013|
Previously published on July 2013
After an extremely long gestation period, on 11 June the European Commission (Commission) finally published a package of documents setting out its proposals for improving redress for violations of rights granted under European Union (EU) law, including infringements of competition law. The package of documents comprises:
a Commission Communication on collective redress, entitled “Towards a European Horizontal Framework for Collective Redress”;
a Commission Recommendation on common principles for collective redress mechanisms (the Recommendation);
a proposed Directive to establish common rules governing private damages actions for infringements of EU and national competition laws across the EU (the Directive);
a Commission Communication on quantifying harm in antitrust cases; and
a more detailed ‘practical guide’ on quantifying harm in antitrust cases, to accompany the second Communication, including analysis of various potential methods for quantification of harm.
EU law recognises the right of victims of an infringement of the law to claim damages for loss caused by that infringement from an infringing party. Although the application of this principle to claims based on breaches of EU competition law was confirmed beyond doubt as far back as 2001, private competition law actions before Member State courts have, in practice, been limited. The Commission estimates that, in the past seven years, victims sought to obtain compensation in only 25% of cases in which the Commission found an infringement.
As well as the usual cost and uncertainty faced by parties to any litigation, competition law claims face a number of additional challenges. First, it may be difficult to prove that the infringement took place. Although this difficulty can be addressed by basing a claim on a prior finding of infringement by a competition authority (a so-called ‘follow-on’ action), claimants still fact the challenge of showing causation and quantifying their loss. Quantification can be particularly difficult in practice, since it typically requires the claimant to show what it would have earned in the absence of the infringing conduct (e.g. if it had not had to pay an inflated price for a cartelised product). The claimant may also have rebut a defendant’s argument that the claimant’s loss was reduced by its ability to raise its prices to its own customers and therefore pass its loss down the supply chain (the ‘passing on defence’). Further complicating the picture, differences between national systems regarding access to documentary evidence may mean that claimants face difficulties in obtaining the necessary evidence to support their claim.
Although the courts of a number of Member States, including the UK, Germany and the Netherlands, have shown themselves to be perfectly willing and able to grapple with these issues, other jurisdictions have seen few or no claims. While such variations in approach are understandable, given the wide differences between national legal systems, concerns of a more political nature have emerged. In particular, some national governments, consumer bodies and the Commission expressed concerns that, while direct purchasers of cartelised products may have the ability, resources and incentive to claim for losses they have suffered as a result of anticompetitive behaviour, this was not the case for end-consumers, i.e. those who were likely to have ultimately borne the loss, assuming that higher costs were passed on down the supply chain. While it could be said in response that half a loaf is better than no bread, in that such claims at least ensure that cartelists end up paying something to at least some of their victims, some observers appear to have viewed such an outcome as instead amounting to a form of unjust enrichment of direct purchaser claimants, who tend to be larger businesses. These concerns promoted examination of ways in which large numbers of indirect purchaser claims could be combined to enable effective collective redress, while avoiding the perceived evils of a ‘class-action culture’.
Since the motivation for more effective collective redress mechanisms is not confined to the competition law area, there has been ongoing debate as to whether any EU-wide legislative action on collective redress should be limited to competition law (a ‘vertical measure’) or should extend to other areas where there may be a need for more effective collective redress mechanisms (a ‘horizontal measure’). Whereas any measure limited to competition law is largely in the hands of the Commission’s competition directorate general (DG COMP), responsibility for any horizontal measure is shared across a number of other DGs, including Consumer Affairs and Justice.
Unsurprisingly perhaps, the above multiple challenges and complexity led to the publication of a bewildering number of papers over an extended period but little concrete action at an EU level. Particular milestones included a Commission Green Paper on private competition law actions in 2005, a White Paper in 2008, and a 2011 consultation on collective redress to identify common principles across the legal systems of the EU and Member States. In between, the Commission prepared a draft Directive on competition damages actions, which was never published and was quietly dropped in 2009, following political opposition from the European Parliament. In the meantime, national legal systems developed their own solutions to the challenge of promoting collective redress, with varying degrees of success.
Publication of this package of documents shows that the Commission is finally ready to proceed with legislation to facilitate competition law damages actions across the EU, while expressing a broader desire to see Member States introducing collective redress mechanisms on a wider basis. In taking this approach, the Commission appears to be seeking to improve the chances that a directive on competition law actions will this time be adopted, by moving the more controversial aspects of the previous draft directive concerning collective redress into the more aspirational Recommendation.
The Directive sets out a number of measures intended to facilitate competition law damages actions. It largely seeks to do so by creating a clear legal basis for such actions and by removing current impediments that have arisen in at least some Member States. As a result, it proposes:
introducing a power for national courts to order companies to disclose evidence;
making infringement decisions of national competition authorities (NCAs) binding before national courts of all Member States;
clarifying rules on limitation periods, to provide for a minimum limitation period of five years;
introducing a rebuttable presumption that an infringement caused harm (with no presumption as to the level);
expressly permitting the passing-on defence, unless it is “legally impossible” for the indirect purchaser to bring a claim, and introducing a rebuttable presumption that harm was passed on to indirect customers; and
putting in place rules to facilitate consensual dispute resolution and settlements.
The Directive also proposes to resolve a lack of clarity in one specific area, namely how the balance should be struck between the Commission’s interest in encouraging infringers to come forward and confess under its leniency regime and a claimant’s interest in gaining access to confidential documents on the Commission’s case file that could help its case. The Commission’s leniency regime relies on the incentive for a cartelist to ‘blow the whistle’, and thereby benefit from immunity from fines, being greater than its reluctance to admit its involvement and thereby trigger an investigation and possible follow-on claims. Clearly, the more likely it is that an investigation will trigger damages claims, and the greater the likelihood that a confession delivered to the Commission to gain immunity from fines will be used against the confessing party in those damages proceedings, the less likely a party is to come forward to seek leniency in the first place.
The Directive addresses this problem by providing for:
absolute protection from disclosure for corporate leniency statements and settlement submissions; and
temporary protection (until the Commission or NCA has closed its proceedings) of documents prepared specifically for the purpose of public enforcement proceedings (e.g. replies to requests for information) or that the authority has drawn up during proceedings (e.g. a statement of objections).
In another measure to prevent greater private actions reducing the incentive to apply for leniency, the Directive provides that, while any infringer should be responsible towards victims for the whole harm caused by the infringement (i.e. joint and several liability), any infringer who cooperated with an investigation and obtained immunity from fines should be liable only for the harm caused to its own direct or indirect customers. In other words, with limited exceptions, successful leniency applicants should not be subject to joint and several liability.
The Recommendation sets out the Commission’s proposals for a common approach to collective redress across Member States, with the aim of enhancing the ability of consumers and SMEs to bring damages actions for the violation of EU laws where the violation has caused losses, including in relation to competition law infringements, while ensuring adequate safeguards to prevent the risk of abusive litigation. It seeks to do this by inviting Member States to introduce national collective redress systems with certain common principles that should be respected. These principles include a system: allowing for injunctive relief and damages; that is not prohibitively expensive; based on the opt-in principle; giving the judge the central role of effectively managing the case; and promoting consensual, voluntary, alternative dispute resolution regimes.
Other recommended safeguards include a suggestion that contingency fees and punitive damages be prohibited; any representative actions be permitted only by officially designated non-profit representative bodies with sufficient finances and with a direct relationship with the EU laws that have allegedly been violated; and restrictions on third party funding. To ensure a balance between public enforcement and private actions, the Recommendation recommends that “as a general rule” collective actions should be possible only once a public authority has found an infringement.
If adopted, the proposed Directive should provide some welcome clarity and certainty in a number of areas, particularly with respect to access to leniency documents and other documents on the Commission’s case file. At present, it has been left for national courts to decide on a case by case basis whether and to what extent claimants can access such documents. This position was restated by the European Court of Justice as recently as 6 June, when it stated that the need to protect leniency documents from third parties does “not necessarily mean that access may be systematically refused, since any requests for access to the documents must... tak[e] into account all of the relevant factors in the case”.
Although the English High Court has demonstrated (in the ongoing National Grid Gas Insulated Switchgear damages case) that it is perfectly willing to take on this balancing task, the Commission has clearly taken the view that the current level of uncertainty is unacceptable and that, without legally binding action at the EU level, the effectiveness of leniency programmes could be seriously undermined.
In some areas, the Directive simply confirms the existing position for competition law damages claims, at least under English tort law, so many of the provisions will appear uncontroversial to a common law audience. Other proposals, including in particular the presumption of passing-on, may actually make it harder for direct purchasers to bring claims, while doing little to facilitate claims by indirect purchase actions in the absence of effective means of collective redress. It would seem to be rather counterproductive if a measure designed to facilitate competition claims were in fact to make it harder for claimants to bring precisely those claims that currently stand the best chances of success.
The fact that the tectonic plates are finally moving at the EU level does not mean that nothing is happening at the level of Member States. In fact, the day after the Commission published its Directive and Recommendation, the UK government’s Department for Business, Innovation & Skills published its Draft Consumer Rights Bill (the Bill) for pre-legislative scrutiny. This includes provisions to implement wide ranging reforms to the private competition law actions regime in the UK (see our earlier client advisory here), including the introduction of a limited opt-out collective actions regime. It is particularly interesting to note this aspect, in light of the Commission’s stated preference for an opt-in system, albeit while recognising that exceptions may be “justified by reasons of sound administration of justice”.
It is unclear how the Bill and the proposed Directive will fare as they pass through the UK Parliament and the European Parliament respectively, and to what extent the timing of the two will fit together. Approval of the Directive in its current form is by no means guaranteed: the proposals may upset some countries where major changes to their civil procedure rules are required, particularly those with strict disclosure laws, and there is bound to be lobbying by those concerned that even this limited measure could lead to unwanted litigation against businesses.
Even if the Directive is adopted, it will still need to be implemented by Member States into national law, opening the possibility of divergent approaches and new uncertainty. Ambiguities in the text of the Directive, for example concerning how liability will be apportioned between infringers, may ultimately need to be resolved by the courts.
It is even less clear how, and to what extent, the aspirations set out in the Recommendation will be implemented by Member States. Although the Recommendation states that Member States “should implement the principles” it sets out within two years, this is not binding and it will be four years before the Commission will assess the implementation of the Recommendation. Depending on the level and practical impact of any implementation, “further measures” (presumably including legislation) may then be considered. It is clear from this that the Recommendation represents merely the most recent, rather than the last, word of the Commission on the subject of collective redress.