An Unpopular Solution to the Private Enforcement Problem

(by Andreas Stephan) The UK’s Department for Business is currently consulting on a package of reforms aimed at making it easier to bring private actions for damages against firms engaged in anti-competitive behaviour. Compensating consumers harmed by cartels and abuse of dominance is something competition authorities throughout Europe feel is important. However, the price to pay for private actions is the potentially enormous transaction costs of legal representation and economic evidence, coupled with the danger of scuppering public enforcement by undermining the leniency programme. One solution not considered in the current debate is to internalise compensation claims within competition authorities, drawing awards from public fines.

The reforms proposed in the UK have been discussed in previous blog posts by Lyons and Peyer. They include: allowing the Competition Appeal Tribunal (CAT) to hear more kinds of competition cases more cheaply; introducing an opt-out collective actions regime for competition law; promoting alternative dispute resolution to ensure that the courts are the option of last resort; and ensuring private actions complement the public enforcement regime, in particular by protecting the incentives provided for companies to whistle-blow cartels. To some extent, these draw on the European Commission’s 2008 White Paper and reports on quantifying damages (2009) and collective redress (2011).

The cost involved in private actions for damages is potentially very significant and some US antitrust law firms are keeping a close eye on the UK as the most promising forum for profitably bringing such actions in Europe. Litigation and economic expertise arguably add little value to the economy in this context (deterrence is addressed below) and constitute a heavy transaction cost for delivering compensation to consumers. The UK consultation recognises this. The proposals outlined above are clearly aimed at limiting costly court proceedings, but they largely hinge on the willingness of parties to settle or compromise in alternative dispute resolution. The extent to which this will occur remains to be seen.

More worryingly, the efforts to encourage private enforcement clash with the protection of leniency programmes. More private actions create two major risks for leniency. The first is that private actions will make the immunity prize in cartel enforcement less enticing, resulting in fewer applications. Damages awarded to customers can exceed public fines, weakening the ‘race to the competition authority’ which will no longer result in a get out of jail free card. The second problem is that firms will not report because of fear that evidence provided through leniency will later be used against them in private actions. Thus in the Pfleiderer case, discussed previously on the blog, the European Court of Justice ruled that EU law does not prohibit access to leniency documents by third parties seeking damages. Access should be determined according to national law, which must weigh the interests arguing in favour and against their disclosure. While the German Court making the reference to the ECJ went on to deny the request for access, the case will cause some concern to prospective leniency applicants. The importance of leniency programmes to public enforcement must not be underestimated. Around two thirds of EU cartel cases are uncovered by leniency applicants, and cooperation by a party in one case frequently results in the discovery of an additional cartel in a neighbouring industry.

The UK consultation seeks views on (1) disclosure of leniency documents and (2) protection from joint and several liability for the revealing firm. Preventing disclosure is essential to avoiding the kind of uncertainty raised by Pfleiderer. The second may provide some comfort to revealing firms, but is weak in contrast with the US Antitrust Criminal Penalty Enhancement Reform Act 2004, which also reduces the revealing firm’s liabilities from treble to single damages.

Crucially, the greater the protection afforded to leniency, the harder it is for customers to bring follow on private actions for damages. Currently the level of private enforcement is weak in Europe even where the existence of the infringement has been established through public enforcement.

Private enforcement in Europe appears to be primarily about compensation, with the added advantage of increased deterrence. Interestingly, private action in the US has always been about the latter; indeed it was the motivation behind allowing treble damages in Antitrust cases. In the European context, damages are actually a very inefficient way to boost deterrence. For the firm, they are simply an extension of the fine and go no way in ensuring the individual decision makers are punished instead of the shareholders. If we want to increase this kind of deterrence, we could simply increase public fines.

In the context of compensation, competition authorities could avert the tensions outlined above by paying out damages from public fines. Affected parties would be asked to submit their claims before the Statement of Objections is issued and the final decision would include a public fine and a compensation payment. This would avert many of the transaction costs, as the competition authority would become a centre of expertise in calculating the harm in lieu of court proceedings. It would make their cases easier to defend at appeal by including more effects analysis. Claimants would not be discouraged by loser pays all cost rules. Importantly, it would also protect leniency as the revealing firm would continue to receive immunity. This would only work in the context of follow-on cases, but the OFT have been criticised for not completing enough cases. The involvement of claimants could actually improve the throughput of investigations. In addition, many of the ‘original’ actions cited in the US context are actually breach of contract cases given an antitrust spin to treble the damages.

The reason the development of such a solution would be unpopular, is that all the interested parties would benefit from more conventional private enforcement. Competition authorities hope it will ease some of the burden on them to deliver punishment, consumers will appear ‘empowered’, and many lawyers and economists could do with the business.

The relationship between public and private enforcement is a central theme in this year’s CCP Annual Conference to be held on 14-15 June.

One Response to An Unpopular Solution to the Private Enforcement Problem

  1. […] come out of the BIS consultation in this area, some of which have been discussed in blog posts by Andreas Stephan and Peter Whelan. Here I focus on the way in which we quantify or measure damages in English […]

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