The European Damages Directive fails to deliver, but can it be fixed?

(by Sebastian Peyer) The European Commission’s Damages Directive[1] was recently signed into law and the Member States have been given two years to implement the rules of the Damages Directive into national law. In this blog post I argue that the Directive fails to achieve its stated goal of compensation because it does not reduce litigation costs or incentivise the bringing of costly legal actions. Instead, the Damages Directive seeks to safeguard public enforcement from private follow-on actions. It is therefore unlikely to facilitate greater levels of private enforcement. For the Damages Directive to become effective, it should be supplemented with further legislation to incentivise stand-alone actions.[2]

The Directive Fails to Reduce Litigation Costs

The Damages Directive will help to improve legal certainty within some Member States by clarifying some aspects of the law, but it is unlikely to significantly facilitate the primary objective of more effective compensation. The main reason is its failure to reduce litigation costs or to provide incentives for victims to bring costly legal action. When designing a system of private enforcement, policy makers can choose between low cost and swift legal process orexpensive, drawn-out litigation procedure. If choosing the latter approach, financial incentives are required to overcome the high costs. A streamlined procedure suffers some shortcomings with regards to fact-finding and judicial review, but it would have created a favourable cost-benefit ratio for prospective claimants. Instead the Damages Directive has chosen to retain drawn-out and expensive litigation procedures, involving significant costs for private parties (legal cost, economic evidence, management time etc), while failing to provide incentives for claimants and law firms to bring actions and assume the risk of losing.

Consumers and smaller companies in particular face potentially large costs that will outweigh the reward from litigation. In general, calculating damages and proving causation are the greatest cost factors in most competition damages claims. Several rules of the Damages Directive are likely to further increase litigation expenses. Standing for indirect purchasers and the passing-on defence will make litigation more cumbersome, hence more time has to be spent in court. Overcharge calculations require data, economic expertise and time. None of it comes cheap. The same applies to access to evidence (disclosure). The Damages Directive facilitates access to documents, especially for stand-alone claimants, but disclosure also raises the cost of litigation.[3]. The UK and the USA – two jurisdictions with disclosure regimes – may serve as prime examples for the costs that can accrue. Furthermore, the complicated arrangements of joint and several liability create uncertainty and are likely to prompt costly satellite litigation. The rules that increase the cost of litigation are not balanced by rules that lower the risks associated with litigation, such as an improved period of limitation, the binding effect of decisions or a presumption of harm in cartel cases.[4]

Compensation – it’s a myth

The Directive’s failure to create funding rules that incentivise law firms (or insurance companies) to assume to risk of legal action, where the client is unable to do so, bars many consumers from accessing compensation. This is because many (including small and medium sized firms) suffer from small individual losses that do not outweigh the potential cost of litigation.

Granting standing to indirect purchasers and introducing the passing-on defence also undermines the goal of compensation. Defendants sued by direct purchasers can invoke the passing-on defence. If successful, indirect purchasers would have to bring a damages claim. Rational indirect purchasers will not sue for petty loss because they lack the means or incentives or both. The Damages Directive does not address this problem and fails to provide the legal tools to aggregate small and individual losses that are most likely to occur at the indirect purchaser level. In the absence of group or representative actions, standing is given to those who are the least likely to sue, while providing a defence to the infringer. This will probably reduce the compensation that has to be paid out to direct purchasers. The new rules, unless improved by the Member States, will also result in less deterrence because they reduce the ‘private penalty’ the infringer has to pay.

It’s public enforcement, stupid

The real objective of the Damages Directive is the coordination of public and private enforcement, or more clearly, protecting information in the hands of the competition authorities from private claimants and maintaining the incentives for companies to cooperate with competition authorities. The Directive limits the exposure of leniency recipients and firms that settle with the competition authority to private damages actions, effectively safeguarding public enforcement. There are good arguments in favour of the protection of leniency and settlement documents. Competition authorities assert that the release of leniency documents would undermine the incentives to blow the whistle. Cooperating firms would fear the exposure to civil claims and not reveal crucial information to the competition authorities. This would mean fewer investigations and, consequently, lower deterrence. It would also mean fewer follow-on actions for damages. Some two thirds of cartel infringements are currently uncovered as a result of leniency in Europe, although there is some question as to how many of those represent active and successful infringements.[5]

The Damages Directive sets out a number of rules that potentially reduce civil liability of leniency recipients and settling firms, safeguarding the incentives to cooperate with public enforcers. Leniency recipients will face a lower risk of being held jointly and severally liable (Article 11(3)) as claimants will have to sue other infringers first before they can request full compensation from the leniency recipient. Article 5 creates a right for parties to access evidence that is held by the opposing or third parties. However, leniency statements and successful settlement submissions are not to be revealed. Access to other documents in the hands of competition authorities is time-barred until the investigation has been concluded. It makes sense to embargo documents that are crucial for an investigation as long as the case is not closed. However, the justification for refusing to disclose documents afterwards is rather weak as whistle-blowers have already received a discount on the public fine. The blatant refusal to disclose any shred of leniency related material may actually be inconsistent with the CJEU’s decisions in Pfleiderer and DonauChemie in which it explicitly required an individual case-by-case assessment of access requests.[6]

How Can Private Enforcement Complement Public Enforcement?

The strong protection of public enforcement from private actions does not affect stand-alone claims but it will reduce the incentives to bring follow-on actions. Most damages actions in Europe are actually follow-on damages actions.[7] With the strong protection of public enforcement, the Damages Directive reduces the incentives to bring follow-on damages action while not providing sufficient incentives for stand-alone claims. Thus, the Damages Directive prevents private enforcement from becoming a strong second pillar of enforcements that could compensate for public shortcomings like, for example, insufficient fines or a low detection rate.

The true beneficiaries of the Damages Directive are competition authorities and firms that cooperate with the competition authorities. The ‘coordination’ of public and private enforcement is a euphemism for the implicit understanding that public enforcement dominates private damages actions. There is nothing wrong with strong public enforcement. However, competition authorities are making increasing use of soft tools like commitment decisions, settlements and decisions based on leniency applications. This undermines the strength of public enforcement without being adequately complemented by private enforcement. This lack of strength will undermine the effectiveness of competition law as wrongdoers need not to fear (too much) public and private enforcement.

It can be fixed

The shortcomings of the Damages Directives are easy to fix. The Damages Directive should be supplemented by further legislation, incentivising stand-alone actions with favourable standing rules (e.g. abolishing indirect purchaser suits), allowing group or representative actions, introducing appropriate funding tools and consumer redress schemes (as a lower-cost alternative to litigation). The objective of private antitrust enforcement should also be revisited. It is not about compensation as this would only include one remedy: damages. Litigation data show that other remedies are useful too, especially when they are faster and come at a lower cost.[8] Hence, deterrence seems to be a more suitable objective for private actions that support and complement government enforcement.

Overall, the Damages Directive fails to deliver effective compensation for victims while (over)protecting public enforcement. The promise of compensation is a thin disguise for the strong protection of public enforcement. The Damages Directive does not strike a balance between private enforcement and public enforcement to the detriment of both. Victims will not be able to sue for compensation due to cost hurdles and the lack of incentive mechanisms while weaknesses of public enforcement are not being compensated by private actions. The problems are not difficult to fix but it requires some thinking outside the (damages actions) box.

[1]Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union [2014] OJ L 349/1.

[2] For a detailed description of the rules of the Damages Directive see my comment in the CPI Antitrust Chroniclehttps://www.competitionpolicyinternational.com/the-antitrust-damages-directivetoo-little-too-late?/ and Sebastian Peyer, “The Antitrust Damages Directive – Much Ado About Nothing?” in Roberto Cisotta, Mel Marquis (eds), Litigation and Arbitration in EU Competition Law (forthcoming, EE Publishing 2015).

[3]See also Sebastian Peyer, “Access to competition authorities’ files in private antitrust litigation” forthcoming in Journal of Antitrust Enforcement 2015 (doi:10.1093/jaenfo/jnu012)

[4] My colleague Bruce Lyons has made a case for a presumption of harm in this blog https://competitionpolicy.wordpress.com/2012/04/25/a-rebuttable-presumption-of-20-price-rise-for-damages-against-proven-cartels/.

[5] Andreas Stephan, “An Empirical Assessment of the European Leniency Notice” (2009) 5(3) Journal of Competition Law and Economics537–561.

[6]Case C-360/09 Pfleiderer AG v Bundeskartellamt, ECLI:EU:C:2011:389, [2011] ECR I-5161; Case C-536/11 Bundeswettbewerbsbehörde v Donau Chemie AG,ECLI:EU:C:2013:366.

[7] Barry Rodger (ed), Competition Law: Comparative Private Enforcement and Collective Redress across the EU, (Kluwer Law International2014).

[8] Sebastian Peyer, “Private Antitrust Litigation in Germany from 2005 to 2007: Empirical Evidence” (2012) 8 Journal of Competition Law and Economics 331–359.

One Response to The European Damages Directive fails to deliver, but can it be fixed?

  1. David Elliott says:

    If competition authorities were required to quantifiy the effect of a cartel, which frankly they are best placed to do and should arguably do to calculate the appropriate fine, then the difficulties with damage claims would be largely solved. So long as we allow competition authorities to base cartel cases just on object then life his hard for damage claimaints.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: