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Private Enforcement of EU Competition Law: Worth the Risk?

About The Author

Matt Bogdan (Former EU & International Law Editor)

Matt graduated with an LLB (2:1) from Durham University in July 2014. Most recently, he has been assisting with research on comparative company law at the Durham Law School. Matt is primarily interested in the TMT sector, but has also been involved in matters of public international law through Durham United Nations Society.

Competition law (commonly referred to as the ‘antitrust law’ in the US) consists of legal rules intended to protect the process of competition in order to maximise consumer welfare and achieve economic efficiency. At the heart of the European Union’s (EU’s) competition law system lie Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU), which restrict an array of anti-competitive practices, including agreements disrupting the competitive process (such as cartels) and abuses of an undertaking’s dominant position in the market (such as price exploitation). Given the wide-ranging and far-reaching nature of the practices covered, breaches of competition rules can be harmful for economies both on a macro level (e.g. disruption of a market) and on a micro level (e.g. financial loss accrued by individuals). Thus, while applying and enforcing competition law has an obvious public interest function to it, it may also be used in order alleviate private losses and the harm suffered by individuals. Competition law envisages two leading pathways of enforcement, one allowing public authorities to take legal action, the other enabling private parties to bring in proceedings, both of which may be used in order to pursue either of the objectives mentioned above.

In the European Union, public enforcement of competition law has historically been the preferred method of responding to infringing anti-competitive activities. The European Commission (‘the Commission’), together with National Competition Authorities, focused on imposing administrative fines as means of achieving effective deterrence and maintaining competitiveness in the markets. As a result, the private enforcement system remained relatively underdeveloped and generally inadequate for enabling private parties to seek legal redress for the harm suffered due to anti-competitive conduct (see the 2004 Ashurst Report). In fact, the Commission found that merely 25% of the antitrust infringements were actually followed by successful damages actions, whereas over 75% of private actors were willing to defend their rights against infringers if provided with adequate legal means for doing so.

The EU’s response took the usual form of an elaborate legislative process, initiated by the Commission’s 2005 Green Paper on Damages Actions, followed by the 2008 White Paper on Damages Actions, and finally culminating with the draft EU Damages Directive, which was adopted by the European Parliament in April 2014.

The Directive establishes some ground rules for damages claims against antitrust infringers and thereby aims to boost private enforcement of competition law across the EU. As intuitive as calling such a development a success may be (especially for private parties seeking redress), it remains debatable whether the strengthening of the private enforcement apparatus will translate into a stronger competition law enforcement system as a whole.

This article exposes the risks associated with the proliferation of private enforcement in the EU and scrutinises the new Directive accordingly. Given that the Directive covers all types of infringements of competition law and that each anticompetitive conduct raises different issues in relation to private enforcement, this article’s scope will be limited to private enforcement in cartel infringement cases only. Cartels are agreements between competing parties that are usually aimed at controlling prices or preventing the entry of another competitor on a given market, both of which may cause substantial losses to various private parties, including direct competitors, new market entrants, downstream market players or end-product consumers.

Finding Space for Private Enforcement

Private enforcement involves privately initiated legal actions (i.e. by consumers, SMEs, NGOs etc.) against an antitrust infringer, which, if successful, lead to civil penalties being imposed by the courts on the infringer (usually consisting of damages). On a theoretical level, it is relatively easy to justify the need for private enforcement. Given the EU’s preoccupation with its consumer welfare goal, and its focus on the ‘prevention, restriction or distortion of competition within the internal market’ (Article 101(1) TFEU), it appears that providing private parties with an effective pathway for accessing full compensation will fit the EU agenda very well. Indeed, achieving redress for victims of anti-competitive conduct has historically been downplayed by the public enforcement authorities, which have put deterrence as their foremost concern, particularly in relation to cartel cases. Accordingly, an effective redress mechanism embedded in the private enforcement system would complement the already existing public enforcement architecture, as suggested by the European authorities in, among others, the 2008 White Paper on Damages Actions as well as by legal commentators (see Wouter Wils, ‘The Relationship between Public Antitrust Enforcement and Private Actions for Damages’ at 3-26). Furthermore, the threat of private litigation itself would simultaneously have the side effect of deterring further anticompetitive conduct.

While in theory boosting private parties’ ability to sue antitrust infringers seems promising, it poses certain practical risks to the entire structure of enforcement of competition law. The most prominent concern is that of the impact of private enforcement on the Commission’s leniency programmes that have been rather effective in destabilising cartels across the EU (see Gorgon Klein, ‘Cartel destabilization and leniency programs: Empirical evidence'). These programmes involve applicant companies self-reporting and providing information on an existing cartel in exchange for either total immunity from or reduction of the fines, which the Commission would have otherwise imposed on them.

However, in the face of a growing threat of private litigation, applying for leniency may seem somewhat risky and futile given the threat of having to pay substantial damages in private litigation despite being protected from the Commission’s administrative fines.

In the US, where the entire antitrust enforcement system is based on a presumption that private enforcement is sufficient to regulate anti-competitive conduct, the costs arising from litigation have been extremely high. Furthermore, from the perspective of victims of cartels, the company applying for leniency would also be the ‘easiest’ defendant to claim against since it has already admitted its guilt. This could be easily resolved by making the cartelists jointly and severally liable for their conduct, which, however, still constitutes a strong disincentive to joining a leniency programme. It therefore follows that granting immunity from private litigation to the leniency applicant could consolidate the sometimes diverging interests of achieving compensation and of promoting deterrence. This, however, raises a difficult question of how can granting an infringing company a privileged position in relation to the injured parties vis-a-vis other infringers be justified. This problem could potentially be avoided by requiring the courts to ascertain the appropriate distribution of payable compensation across all jointly and severally liable cartelists (instead of opting for a prima facie immunity from private litigation for the leniency programme applicant). Unfortunately, such solution is unlikely to instil confidence into cartelists seeking leniency, particularly in situations where the expected outstanding damages exceed the level of administrative fines, which the applicant would circumvent upon successful enrolment onto the programme.

Closely related to the problem surrounding the leniency programmes is the issue of asynchronous access to information. Given the conspiratorial nature of cartels, information about infringements is generally difficult to obtain. The European competition enforcement authorities not only have the financial resources and expertise necessary for acquiring and interpreting such information, but also have access to specific measures designed for gathering information, such as, for instance, the dawn-raids (more advanced and far-reaching examples of such measured may be found in the US jurisdiction). While it can be argued with regard to other competition law infringements (such as price discrimination) that private parties in the vertical market chain (such as wholesalers) may have immediate access to information concerning an infringement, nonetheless in cases of cartels the public enforcement authorities usually have the upper hand. Accordingly, private enforcers’ success in litigation may heavily depend on their ability to gain access to the information already gathered by the public enforcers, which may include the leniency documents submitted to them by the leniency programme participants. This, however, carries the risk of enabling business espionage and may consequently lead to an increase in malevolent suits. It is therefore imperative that the disclosure conditions are precise and unambiguous, which is one of the facets of the new Directive discussed below.

The final risk associated with boosting of private enforcement lies in the uncertainty surrounding the damages claims themselves. While the European public enforcement authorities have guidelines on how to quantify the administrative fines imposed on cartelists (extensive synopsis available here), the damages claimed in private enforcement actions may quickly escalate with the increasing number of claimants involved in class actions. In addition, the involvement of the courts themselves introduces further uncertainty into the enforcement process with regard to estimating the overall costs of infringement for the infringing company. As Frank Maier-Rigaud points out, this usually necessitates establishing an accurate counterfactual scenario (i.e. inquiry into what would happen if no cartel was created in the first place), which can be a particularly troublesome task, especially as complete information is usually not available.

Arguably, this can be resolved by having a system of precedents introduce certainty into the judicial estimation of damages, however such process will often be hindered when the parties decide to settle outside of the court, which itself is a frequent occurrence. All in all, these variables may give rise to situations where two actors incur drastically different costs (in fines and payable damages) for the same type of infringements of competition law. What may follow is a potential challenge under Article 6 of the European Convention on Human Rights, which prescribes the right of fair treatment in both individual and comparative cases.

Accordingly, allowing private enforcement to complement the public one carries a real risk of over-deterrence that can result in a company’s bankruptcy and ultimately hinder the competitiveness in a given market. Simultaneously, it has been shown that the administrative fines imposed by the European Commission on cartelists are often too low to mitigate the total welfare losses (see Roger Van Den Bergh at page 13). While this may hold true in certain cases, particularly in light of the fines frequently imposed in the US (which dwarf the EU ones), it is submitted that adjusting the system by altering the quantification formulas for administrative fines should be preferred instead of executing the said adjustments by encouraging private litigation, reason being that the former solution promotes legal certainty. Some commentators, including Thomas Eilsmansberger, have claimed that the pre-occupation with damages claims is misdirected and instead remedies such as an injunctive relief would function better because thereby the costly US-themed risks could be avoided. This, however, would not satisfy the ‘full compensation’ objective emphasised by Joaquin Almunia, the Commissioner responsible for competition in the EU, and would be unlikely to create sufficient encouragement for the cartel victims to sue the infringers.

Fitting in the New Directive

Prior to the adoption of the EU Damages Directive, the EU framework for damages claims has been underdeveloped. Legal action against infringers could be taken domestically under Articles 101(1) and 102 TFEU, which both have horizontal direct effect under the Van Gend & Loos case (which was confirmed in the Brasserie de Haechtcase). The damages remedy itself, however, was mentioned nowhere in the EU laws despite judiciary statements in cases such as Courage v Crehan, where the availability of damages claims was considered essential for ensuring that the prohibitions in Articles 101 and 102 are effectively enforced. Thus, the EU competition law system was centred on behaviour control (deterrence) and provided no real means of achieving compensation apart from the disgorgement of unjust enrichment remedy, which obviously yielded no financial gains to the claimants.

The EU Damages Directive was introduced primarily in order to regulate the interaction between private and public enforcement regimes and to ensure that the victims of infringements of EU competition laws can obtain full compensation from the harm they have suffered by laying down some basic rules regulating antitrust damages claims (see the Commission’s communication regarding the proposal for the new Directive). Simultaneously, the Directive clearly attempts to safeguard the Commission’s leniency programme, a concern over which was emphasised above.

The disclosure of evidence to private party claimants is subject to three conditions, two of which are vague enough to produce uncertainties. The first requires ‘reasonably available facts sufficient to support the plausibility of the claim’. Unfortunately, as Christopher Weidt points out, no examples or specifications of what amounts to ‘plausibility of a claim’ are provided in the legislation. The second condition requires a ‘circumscription of the evidence as precisely/narrowly as possible’. This could prove quite challenging for private litigants, because they will usually be unaware of what kind of documentation is available. Hence, it is likely that the courts will be accepting requests, which merely define a category of the documents (such as, for example, ‘sales documents’). This may lead to disclosures of data, which is not essential to the filing of the damages claim. Finally, as Robert Babirad points out, it is crucial that the Commission is also willing to give the term ‘evidence’ a wide interpretation and disregard the store medium used for containing the said evidence, thereby drastically expanding the scope of evidence potentially collectable by the private litigants.

The Damages Directive also employs a ‘grey and black lists’ system. The former protects documents during the time when the proceedings of the competition authorities are underway, whereas the latter provides a general prohibition of disclosure of leniency programme documentation. While this is a welcomed development, its compatibility with the ECJ rulings on Articles 101 remains to be assessed. In the Donau Chemie case, the courts stated that a complete refusal to grant access to files of a national competition authority undermine the rights conferred by Article 101. Thus, the black list envisaged by the Directive seems to stand in contradiction to this decision. In anticipation of this incompatibility, Alexander Italianer of the Directorate General for Competition (European Commission) has stated in his speech from June 2014 that it is only corporate statements and leniency settlement submissions that will be included on the black list, which grants full protection from disclosure. This, however, still does not seem to reconcile the court’s worries about the effectiveness of Article 101 with the existence of the black list. 

Conclusion

In an ideal world private enforcement of competition law could function as a tool complementing the public enforcement apparatus. Together, they could form an efficient and effective mechanism of providing access to justice on both the macro and the micro level. Unfortunately, reconciling these two pathways of enforcement of competition law is highly challenging in the real world. Whereas enabling private enforcement should be encouraged, it is imperative to ensure that this will not negatively affect the functioning of public enforcement since while the latter is conducted mainly with protection of competition in mind, the former remains an unpredictable tool that is unavoidably preoccupied with mitigating personal losses.

Further Reading on the Role of Private Enforcement

  • T Eilmansberger, ‘The Green Paper on Damages Actions for Breach of the EC Antitrust Rules and Beyond: Reflection on the Utility and Feasibility of Stimulating Private Enforcement Through Legislative Action’ (2007) 44 CMLR 431.
  • MJ Frese, ‘Fines and Damages under EU Competition Law: Implications of the Accumulation of Liability’ (2011) 34(3) World Competition 397.
  • R Van Der Bergh, ‘Private Enforcement of European Competition Law and the Persisting Collective Action Problem’ (2013) 20 MJ 12.
  • E Hjelmeng, ‘Competition Law Remedies: Striving for Coherence or Finding New Ways?’ (2013) 50 CMLR 1007.
  • C Hodges, ‘European Competition Enforcement Policy: Integrating Restitution and Behaviour Control’ (2011) 34 World Competition 383.
  • C Kersting, ‘Removing the Tension Between Public and Private Enforcement: Disclosure and Privileges
for Successful Leniency Applicants’ (2014) 5 JECLP 2.
  • F Maier-Rigaud, ‘Umbrella Effects and the Ubiquity of Damage Resulting From Competition Law Violations’ (2014) 5 JECLP 247.
  • A Schwab, ‘Finding the Right Balance – the Deliberations of the European Parliament on the Draft Legislation Regarding Damage Claims’ (2014) 5 JECLP 65.

 Further Reading on the EU Damages Directive

  • CF Weidt, ‘The Directive on Actions for Antitrust Damages After Passing the European Parliament’ (2014) ECLR 438.
  • G Downie and M Charrier, ‘UK and EU Developments in Collective Action Regimes for Competition Law Breaches’ (2014) ECLR 369.
  • RK Babirad, ‘The Commission's proposal for a Directive on Damages for Anti-competitive Infringements: an Increase in Evidentiary Accessibility, Disclosure and Legal Certainty for Private Litigants’ (2013) GCLR 155

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Tagged: Commercial Law, Company Law, European Union

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