Private enforcement of competition law in Europe – a boardroom issue
March 2015 | SPOTLIGHT | COMPETITION & ANTITRUST
Financier Worldwide Magazine
The growth, development and prominence of private enforcement of competition law in Europe have turned it into an issue that increasingly finds its way onto boardroom agendas. Many entrepreneurial general counsels are seeing an opportunity to turn their in-house legal departments into a revenue centre for the business and a means by which to return value to shareholders. Whilst for those companies that are under investigation and have been found to have infringed competition law, the very real risk of follow-on damages claims means that the stakes could not be any higher.
With the liability for damages claims often exceeding the value of the financial penalties imposed by the competition authorities, and the continued vigorous investigation of competition infringements, it has never been more important for in-house lawyers and management teams to understand and address the issues arising from private enforcement. As 2015 and 2016 herald the introduction of further legislative reforms at both European level and in the UK, the issue of private enforcement will become even more important. This article looks at these forthcoming reforms and addresses the potential implications for companies doing business in Europe.
Follow-on damages litigation
The last five years has seen private enforcement of competition law become a common feature of the European legal landscape. The consistent flow of infringement from the European Commission and active national competition authorities, such as the German Federal Cartel Office, has exposed companies found to have infringed competition law to the risk of follow-on damages claims and at the same time placed corporates on alert of potentially significant claims they may have against their suppliers. These infringement decisions play a key role in the civil damages litigation, as claimants are able to rely upon the findings of infringement as proof of liability in damages claims – hence the term ‘follow-on’ damages litigation. Accordingly, these claims are often disputes regarding the extent of the loss and damage caused. For defendants, the extent of the findings of infringement will have a significant bearing on the scope of financial exposure. For claimants, they are presented with a likely success and the issue is how much they can recover.
The ability of companies to bring claims knowing that they have already satisfied the need to establish liability leaving them just needing to establish quantum is why the issue of private enforcement is gaining such prominence. It is not often that a general counsel can inform his or her board that they are considering litigation that they know should produce a positive financial outcome. To date, despite the significant number of follow-on damages claims that have been brought across Europe, none have ever gone to a judgment – the claims have all settled, often at a relatively early stage in the litigation process. Often the likelihood of a potentially very significant financial recovery can be the catalyst for many boards to recognise that they should consider pursuing follow-on damages claims; accordingly, they can ensure they are acting in the best interests of their shareholders.
The European reforms
On 6 November 2014, the European Parliament and the Council of the European Union passed into law a directive setting out rules governing actions for damages under the European Union’s Directive on Antitrust Damages Actions. The objective of the directive is to facilitate civil damages claims across the European Union, a policy that the European Commission has been pursuing for some time. Member States have two years to implement the provisions of the directive into their legal systems.
The European Commission has stated that it sees private damages actions and public enforcement of competition law by authorities as complementing each other. Therefore, the directive seeks to facilitate claims in order for purchasers to obtain full compensation, be it actual loss, lost profits and interest, whilst at the same time ensuring that competition authorities can effectively investigate and punish infringements.
There are several key provisions provided for by the directive. Firstly, it seeks to address the lack of any proper system of disclosure in most member states. National courts will be able to order defendants to disclose certain relevant documentation. While this will make it easier to pursue claims in other national courts, the ability to gain disclosure in English courts will mean that they continue to be the preferred courts in which to bring follow-on damages claims.
Secondly, the directive seeks the standardisation of a minimum period within which to bring follow-on damages claims. Claimants will be able to bring damages claims within at least one year after an infringement decision becomes final.
Thirdly, the decisions of a national competition authority will be proof of liability before courts of the same member state in which the infringement occurred, and will be prima facie evidence of infringement before other member state courts. This will enable greater forum shopping by claimants, bringing claims in more favourable jurisdictions such as England, Germany and the Netherlands.
Fourthly, the directive will allow parties to overcome the difficulty of proving loss due to the secretive and historic nature of cartels, there will be a rebuttable presumption of loss. This applies to both loss suffered by direct purchasers as well as any indirect purchasers. In the case of indirect purchasers, the rebuttable presumption is that some of the higher prices were ‘passed on’ along the distribution chain. Courts will also be able to estimate the harm if it is not possible to precisely quantify the loss.
Finally, although defendants are already jointly and severally liable for any loss caused by a competition infringement, in the case of the whistleblower who obtained leniency from a competition authority, under the directive, they will only be liable for losses arising from their sales. Claimants will be able to claim against a leniency recipient from whom they had no purchases, only if they are unable to recover compensation from the other companies involved in the infringement (if for example, they have become insolvent).
The UK reforms
Among a number of reforms to private enforcement of competition law in the UK, of most significance is the government’s introduction of an ‘opt-out’ collective redress mechanism for victims of competition law infringements. The Consumer Rights Bill was introduced into parliament on 23 January 2014 and is currently making its way through the legislative process. It is expected to come into force in or around October 2015.
While the UK has had a collective action regime for some time, due to it being an opt-in procedure whereby potential claimants must make the decision to participate in the proceedings, it has proven unattractive and resulted in only one claim being brought by a consumer association thus far. The bill will allow for claimants, who fall within a class for the purposes of a proceeding, to be automatically included in that proceeding, unless they opt-out – essentially a US class action regime. The ability to bring claims on behalf of all UK consumers will make such follow-on damages claims far more attractive for lawyers and funders.
Private enforcement of competition law is presenting both opportunities and risks for boards and in-house legal departments. These are set to increase over the course of the next two years as the European and UK reforms come into operation, facilitating even more private enforcement all across Europe. Given the financial amounts at stake, many companies are looking to implement measures that will enable them to identify and maximise the opportunities for recovery of damages. Those facing investigations and infringement decisions need to ensure that they are looking at not only how they defend the investigations, but also how to reduce their potential exposure to follow-on damages claims. Whichever position companies may find themselves in, understanding the issues and the implications of the latest reforms is essential.
Boris Bronfentrinker is a partner and Frances Gourdie is an associate at Quinn Emanuel Urquhart & Sullivan LLP. Mr Bronfentrinker can be contacted on +44 (0)20 7653 2000 or by email: firstname.lastname@example.org. Ms Gourdie can be contacted on +44 (0)20 7653 2000 or by email: email@example.com.
© Financier Worldwide
Boris Bronfentrinker and Frances Gourdie
Quinn Emanuel Urquhart & Sullivan LLP