An Argument Against a Specific Statutory Passing On Defence in Private Enforcement

(by Duncan Sheehan) One of the issues raised in the BIS consultation on private actions in competition law, is whether legislation should directly address a passing on defence. My controversial claim is that there is no defence in English competition law of passing on, and there should be no defence of passing on either. The law already deals with the problem by other means.

In its simplest form, the scenario is that a cartelist (A) illegally raises the price of a product sold to a manufacturer (B), who then passes on the whole overcharge to his customer. The argument goes that B has suffered nothing, and therefore if B sues A, A should be able to turn round and say so, thus defeating the claim. At the same time the consumer is given a claim, and is referred to as the indirect purchaser. Different regimes operate in different systems. US Federal law denies passing on altogether and allows B to claim damages. State law typically allows A to cry foul when B sues, but not when the consumer does. In a previous post, primarily concerned with quantification of damages, I made the broader point that having special context-specific regimes encourages attempts to slip claims in where they don’t really belong to get access to a perceived better procedure, or better remedies, or longer limitation period. That is (without good reason) distorting, and from the point of view of legal theory risks unprincipled chequer-board law.

Peter 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 is a defence. It is not a defence. It is a question of quantification of loss, and loss allocation between claimants. As such it is analogous to the tort law rights of claimants in cases like Hunt v Severs.[1] The case concerned Miss Hunt, who was severely injured in a car crash, leaving her requiring round the clock care. Her fiancé had to give up work in order to become her carer. A claim was made against the insurance for the cost of care. The claim included losses to the partner/carer as a result of having to give up work to look after the immediate victim of the negligence. In those cases the carer piggy-backs his claim for his own loss on the immediate victim’s cause of action against the person who caused the accident (and in this case their insurance).

The analogy with competition law works like this. Essentially the indirect purchaser is the equivalent of the carer, the immediate victim the equivalent of the direct purchaser, and the cartelist is the driver’s insurance company. This gives us the exact result that we want. The indirect purchaser is able to recover; the direct purchaser cannot keep compensation for losses he has not suffered, and if the direct purchaser is disinclined to sue (perhaps, because he has passed on the whole overcharge), the indirect purchaser can compel him to sue, or be subrogated to his cause of action. It also has the advantage that the cartelist does not need to prove what has happened in the claimant (direct purchaser’s) business when he has no information at all about that.

Finally, the analysis is consistent with wider private law analyses – there is no risk of claimants trying to get into (or out of!) a special context-specific statutory defence. Indeed without legislation, what I have just described is (not should be, but is) English law. There are procedural advantages too. Sebastian Peyer in an earlier blog post criticised the decision in Emerald Supplies v British Airways.[2] In that case freight forwarders and their customers sued for compensation due to them as a result of a cartel, which had raised the prices of air freight. Sebastian argues this just makes it harder for claimants at different levels in the supply chain to sue. Mummery LJ argued that direct purchasers (the freight forwarders) cannot claim in the same representative action as their customers[3] because British Airways might have different defences (ie passing on) against some but not others. If, however, passing on is viewed as I have suggested, this is shown as fallacious and irrelevant; British Airways does not have different defences against different parties, because there is no defence to be had.

In my last blog post I identified several different types of damages. It is important then to see which of these can or cannot be passed on. Some things by their nature cannot be passed on. Restitutionary damages for example cannot be passed on, nor can my loss of profits. One criticism of passing on is that it might leave the direct purchaser who has passed the overcharge disinclined to sue; coupled with that it is said that the indirect purchaser doesn’t have the information to sue. If the direct purchaser still has a claim for the cartelists’ profits, or his own lost profits he most certainly does retain some incentive to sue the cartelist. The calculations – and indeed questions of cumulation of heads of damages – can and will get very complex, but they are complex in other areas, such as intellectual property wrongs. There is no reason to think English courts are incapable of the task of quantification, and the only call for legislation should be to codify the loss allocation model to clarify what English law already is.

[1] [1994] 2 AC 350

[2] [2010] EWCA Civ 1284

[3] Under Civil Procedure Rules (CPR) 19.6

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