The Passing-on Defence Should be Recognised in Legislation

(by Peter Whelan) The recent publication by the Department of Business, Innovation and Skills of Private Actions in Competition Law: A Consultation on Options for Reform acknowledges that considerable legal issues remain to be resolved concerning private enforcement of competition law in the United Kingdom. One of these issues is the exact status of the passing-on defence (i.e., the defence that allows an infringer to escape liability in a damages action by a given purchaser to the extent of any pass-on by that purchaser). The lack of certainty concerning the status of this defence acts as an obstacle to the initiation of private actions. This problem should be overcome by the express acknowledgment of the passing-on defence in legislation.

The passing-on defence can be rationalised as follows. First, it is arguable that under EU law the indirect purchaser has the right to sue for damages if she has suffered due to a violation of Article 101 or 102 TFEU. In Manfredi [Joined Cases C-295/04 to C-298/04, [2006] ECR I-6619], for example, the Court of Justice held at [61] ‘that any individual can claim compensation for the harm suffered where there is a causal relationship between that harm and an agreement or practice prohibited under [Article 101 or 102 TFEU]’ (emphasis added). Incidentally, if this is so, then S 60 of the Competition Act 1998 would also require indirect purchaser standing when private litigants pursue damages for the violation of the Chapter I or II prohibitions. Second, if indirect purchaser standing is indeed granted, then in order to ensure consistency with the objective of just compensation one is required to acknowledge the existence of the passing-on defence. This is so as the non-recognition of the defence unjustly enriches the direct purchaser, who can consequently receive damages for a loss she has not in fact suffered. By contrast, the acknowledgement of the defence in this context ensures that damages will only be paid where the loss is actually suffered.

Additional advantages of the recognition of the defence can also be identified. For example, in the case of a follow-on action, the existence of the passing-on defence helps to reduce the scope for violation of the principle of ne bis in idem (double jeopardy). This is so as the passing-on defence avoids the imposition of damages above the level required for compensation to be achieved. In other words, it avoids the imposition of what can be conceptualised as punitive damages. In Devenish [[2007] EWHC 2394 (Ch)] it was held that the imposition of punitive damages in a follow-on action would result in a violation of ne bis idem if a fine was initially imposed for the competition violation by the relevant competition authority. (It would also violate Article 16 of Regulation 1/2003, if the underlying enforcement decision was adopted by the EU Commission).

The arguments against recognition are not very persuasive. Above all, it is feared that the courts are not well equipped to deal with the passing-on defence and the economic assessments that will inevitably have to be carried out as a result of its recognition. However, courts are regularly called upon to carry out complex economic evaluations in tort cases. In other areas of law where the passing-on defence is recognised, such as that relating to taxation, the judiciary have not expressed misgivings about the added complexities engendered. Furthermore, following the adoption of Regulation 1/2003, when enforcing the EU competition law rules, national courts are expected to be able to cope with the demands placed on them by Article 101(3) TFEU, a provision of EU law that requires one to conduct complex economic assessments. In the author’s opinion, advocates of non-recognition should have a little bit more faith in the judiciary of this particular jurisdiction.

None of this is to say, however, that there are no difficulties with the use of the passing-on defence. In particular, its existence may have an impact on the incentives of injured purchasers (who have passed-on some of their injury) to sue: the reduced size of the potential prize, coupled with the transactions costs and risks associated with litigation, could tip the balance in favour of non-action by the injured party. Such a problem can be addressed by the use of other mechanisms to incentivise injured parties to sue.  By making certain choices regarding, e.g., collective actions, representative actions, legal presumptions concerning the size of the overcharge, cost rules etc., the legislature can increase the incentives facing the purchaser who has been injured. Measures designed to encourage and support private enforcement should of course be understood as a package: these measures are interlinked and cannot be analysed in isolation. The point here is that: (a) the passing-on defence must be recognised if the indirect purchaser can sue and the principle of fair compensation is to be operationalised; and (b) other mechanisms exist to readdress any imbalance in incentives occasioned by the recognition of the passing-on defence.

2 Responses to The Passing-on Defence Should be Recognised in Legislation

  1. […] 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 private law and ask […]

  2. […] Whelan suggested in an earlier blog post that the defence of passing on be recognised in statute, but he falls into the trap of thinking it […]

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