On 11 June 2013, the European Commission published a package of measures aimed at making it easier for victims of illegal cartels and other violations of European law to recover damages before national courts throughout the European Union. Following several years of political debate, the key documents published by the Commission are:
- proposal for an EU directive on civil antitrust damages litigation.1 The proposed directive would partially harmonise the widely differing member state rules of substance and civil court procedure that apply in private actions for damages concerning violations of EU competition law. It notably addresses: preservation and disclosure of evidence (including leniency documents), binding effect of authorities’ decisions, the ‘passing-on’ defence, limitation periods, joint and several liability of infringers, and proof and quantification of harm; and
- non-binding recommendation2, urging member states to enable groups of victims to bring court actions more efficiently (‘collective redress’) when seeking injunctions or compensation for violations of EU competition and any other substantive EU laws.
Both instruments apply to all types of EU competition law infringements (hard core cartels, general anticompetitive arrangements and abuse of dominance), and the recommendation applies in addition to violations of any other EU substantive laws. The proposed directive will now be discussed by the European Parliament and the Council, where it may face resistance at least on certain aspects.3 Once adopted, the directive would allow EU member states two years to bring the changes into force. The recommendation on collective redress is immediately applicable but does not legally bind the member states. It asks member states to reform their national laws in line with the recommendation during the next two years.
KEY IMPLICATIONS FOR COMPANIES
Should the proposed directive be voted into law and the recommendation be followed by member states, key implications for companies would include the following:
More widespread private actions for antitrust damages throughout Europe
The measures can be expected to enhance the ongoing trend towards more private litigation for antitrust damages in Europe. This makes violations of EU competition law even more costly for infringers but also makes it easier for victims of infringements to obtain compensation.
No full harmonisation of applicable rules
Given the considerable leeway that member states will enjoy in practice when transposing the directive’s provisions into national law (and when applying that law), plaintiffs will likely continue to find it more attractive to bring damages actions in some member states than in others. The directive will not achieve full harmonisation.
Easier access to evidence, with uncertain protection of business secrets and legal advice
Companies’ business secrets and correspondence with lawyers may be caught by the directive’s rules on mandatory disclosure of evidence. The directive does not create a clear system for the protection of business secrets, leading to risk that a company’s business secrets might be improperly used outside the damages litigation. Moreover, the directive does not enhance or harmonise the divergent member state rules on legal professional privilege. This emphasises the need for companies and advisers to carefully design strategies that minimise risks of mandatory disclosure, for example when conducting internal investigations.
Evidence resulting from a company’s voluntary co-operation with public enforcement authorities is granted only limited protection from disclosure
Evidence that companies assembled or newly created for purposes of voluntarily co-operating with competition enforcement authorities, notably in the context of leniency procedures, will largely be subject to disclosure and thus become available to private plaintiffs. Before deciding to co-operate with enforcement authorities, companies should take this risk into account.
New document preservation obligations, even for non-parties to the litigation
Companies should carefully review the directive’s rules requiring them to preserve evidence that might be relevant to an antitrust damages action. Evidence preservation obligations apply not only to parties to the litigation, but also to third parties.
Collective redress, but no US-style class-action culture
The recommendation suggests member states should introduce collective redress mechanisms at least on an ‘opt-in’ basis, but at the same time suggests safeguards to avoid introducing a US-style class-action litigation culture in Europe.
KEY PROVISIONS OF THE PROPOSED DIRECTIVE
Principle of court-ordered disclosure of evidence (Article 5)
Courts must have the power to order any party to the litigation and third parties to disclose evidence that is relevant to the damages litigation, provided the pieces or categories of evidence requested are: ‘… defined [by the requesting party] as precisely and narrowly as he can on the basis of reasonably available facts’ and provided that the obligation to disclose is ‘proportionate’ in light of each side’s ‘legitimate interests’. This disclosure system is modelled on the rules that the EU introduced for civil litigation in the area of intellectual property law in 2004. Judging from that experience, the rules are likely to be interpreted fairly differently by courts in different member states, notably as regards the specific detail that courts will require for the identification of evidence to be considered suitably precise.4 However, the Commission itself suggests that broad requests such as for ‘all documents submitted to the Commission by a leniency applicant’ should not be approved by a judge.
Confidential information of a company is not exempted from disclosure, although the directive suggests that courts should take steps to preserve its confidentiality. How that will be handled in practice is not clear, thus leading to risk that disclosed confidential information will be improperly used outside the litigation. In addition, the directive does not harmonise legal privilege rules, which will invariably mean that it will be easier for plaintiffs to obtain lawyer-client communications or work products in some member states than in others. International plaintiffs will seek to take advantage of this.
Limited exemptions from disclosure relating to leniency and public enforcement activity (Articles 6 and 7)
There are only a few narrow categories of evidence that are exempted from the obligation to disclose. These exemptions aim at protecting the competition authorities’ public enforcement activities, notably by keeping leniency programs sufficiently attractive. The directive exempts leniency corporate statements and settlement submissions permanently from disclosure, and a few other types of documents (such as the Commission’s Statement of Objections and information prepared by the company specifically for purposes of the leniency procedure) on a temporary basis until the competition authority has closed its case. However, it remains to be seen whether these permanent or temporary disclosure bans will hold under the case law of the European Court of Justice in light of the judgments in Pfleiderer v Commission  and Bundeswettbewerbsbehörde v Donau Chemie .5 These judgments arguably may be read to suggest that, as a matter of primary EU law, national courts must in each specific case have the possibility to decide on the disclosure of any category of evidence, after weighing the interests for and against disclosure.
Overall, it is likely that most types of documents, such as pre-existing company documents that a leniency applicant submits to the authority together with its corporate statement, can be obtained by plaintiffs at some stage. This needs to be considered in the overall risk assessment when a company decides whether or not to voluntarily co-operate with a competition enforcement authority.
Evidence preservation obligations (Article 8)
The proposed directive introduces court-ordered sanctions for the destruction of evidence that is relevant to antitrust damages litigation. This effectively places an evidence preservation obligation on companies in situations where they hold relevant evidence and they know, or should reasonably know, that an action for damages has been brought. This obligation also applies to non-parties to the litigation, such as direct purchasers in litigation brought by indirect purchasers against a cartel of manufacturers.
Easier proof of violation, causation and harm (Articles 9 and 16)
Final infringement decisions of the Commission or a member state authority or a review court6 will constitute binding proof that a violation of EU competition law has occurred.7 Moreover, for situations of cartel infringements, the directive sets out a rebuttable presumption that the cartel infringement caused harm. The burden for quantification of that harm lies with the claimant, but must not be made ‘practically impossible or excessively difficult’ by procedural rules. Importantly, the court shall have the power to estimate the amount of harm.8
Passing-on defence and claims by indirect purchasers (Articles 12 and 13)
The draft directive recognises the passing-on defence, thus the rule that a cartel infringer should not have to compensate its direct customers if the infringer can prove that its direct customers have passed on the cartel overcharge to their own purchasers (thus, to the ‘indirect purchasers’ of the cartel infringer). The pass-on defence is not available if it is ‘legally impossible’ for the indirect purchasers to claim compensation for their harm, but the directive does not specify under which circumstances this would be the case. Indirect purchasers have standing to bring claims against the cartel members and benefit from a rebuttable presumption that the overcharge was passed on to them. Moreover, courts can estimate which share of the initial overcharge was passed on to the indirect purchasers, making it easier for the indirect purchasers to prove their case.
Longer and harmonised limitation period (Articles 10 and 17)
Plaintiffs have at least five years to bring their claims. This period does not start until the injured party knows, or could be expected to have reasonable knowledge of, all of the following elements: the behaviour constituting the infringement; the qualification of such behaviour as an infringement of competition law; the harm suffered; and the identity of the infringer. In addition, the limitation period does not start before the day on which a continuous or repeated infringement ceases. The period is suspended during competition authority proceedings and for a period of at least one year after the infringement decision has become final, as well as for periods during which plaintiffs and defendants negotiate private settlements.
Joint and several liability (Articles 11 and 18)
Each member of a cartel is jointly and severally liable vis-à-vis cartel victims for the damage caused by all cartel members. A cartel member who paid more to plaintiffs than the harm it caused can afterwards request contributions from the other cartel members so that every cartel member ultimately pays according to its relative responsibility.9 However, to make immunity applications more attractive, the directive holds a successful immunity applicant liable only vis-à-vis its own direct and indirect purchasers, unless the other victims of the cartel are unable to obtain full compensation from the other infringers. Similarly, to encourage private settlements, if a defendant reaches a private settlement with plaintiffs, that defendant would not subsequently have to respond to contribution claims from other defendants.
RECOMMENDATION ON COLLECTIVE REDRESS
The recommendation urges member states to introduce collective redress mechanisms that are ‘fair, equitable, timely and not prohibitively expensive’. The overall goal is to provide consumers and small businesses with a workable mechanism to bring claims that are too small to warrant individual court actions while preventing abusive litigation.
The recommendation favours the opt-in approach for collective redress, where claimants have to actively opt to be part of the action. However, member states remain free to allow opt-out actions, as have recently been proposed in the UK.10
Representative actions (that is, actions brought by a government or private entity on behalf of several claimants) should only be allowed if the entities have been officially designated or certified on an ad-hoc basis by a member state court or authority. Moreover, the entity should be non-profit making; have objectives that have a direct relationship with the EU rights that are claimed to have been violated; and have sufficient capacity (eg financial and human resources) to represent multiple claimants.
Funding of actions
Concerns previously expressed that certain funding mechanisms can potentially incentivise abusive litigation are reflected in the recommendation. Accordingly, member states should not normally permit lawyers’ fees that are calculated as a percentage of the compensation awarded (contingency fees). It remains to be seen how this recommendation might impact upon UK-style conditional fee arrangements and/or damages-based agreements. Further, the recommendation states that, where funding is provided by a third party, safeguards should be put in place to guard against conflicts of interest and the possibility of undue influence of the third party in matters such as settlement discussions. The losing party should reimburse the necessary legal costs borne by the winning party.
Injunctive and compensatory relief but no punitive damages
Injunctive and compensatory relief should be available in collective redress actions. Punitive damages should not be awarded, as the Commission fears that the availability of punitive damages may give rise to abusive litigation.
The recommendation also sets out the Commission’s position in relation to a number of other areas, including standing, admissibility and alternative dispute resolution. In addition, the recommendation requests that member states establish national registries of collective redress actions.
The English courts are already a popular forum in which to bring claims for damages resulting from competition law infringements. Indeed, it is arguable that the Commission’s proposals will not have much impact on the system currently in place in England and Wales, where many of the concepts are already well engrained. Perhaps most notable is the decision of the Commission to call for an opt-in system for damages claims at a time when the British government has concluded that an opt-out approach is needed due to the failure of the opt-in system to stimulate a significant number of claims. Whatever the outcome of these proposals, it would seem that damages claims for competition law infringements are only set to rise.
By Axel Gutermuth, counsel, Christopher Stothers, partner, and Mark Gardner, associate, Arnold & Porter (UK) LLP.
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- Proposal for a directive of the European Parliament and of the Council on certain rules governing actions for damages and national law for infringements of the competition law provisions of the member states and of the European Union, COM(2013) 404.
- Commission Recommendation on the common principles for injunctive and compensatory collective redress mechanisms in the member states concerning violations of rights under union law, C(2013) 3593/3.
- It has been announced that the centre-right European Peoples’ Party will guide the legislation through the European Parliament. Interestingly, the appointed ‘rapporteur’ who will write a report on the proposed legislation and gather views on the proposals (Andreas Schwab MEP) has already suggested that amendments may have to be made to increase the protection afforded to documents submitted to the Commission under its leniency programme.
- Directive 2004/48, of the European Parliament and the Council of 29 April 2004 on the enforcement of intellectual property rights. In a recent review of this directive, the Commission noted that member states have interpreted the provisions on disclosure differently, notably on the question of when a request is sufficiently specific to be allowed and when documents are under the ‘control’ of a party. See Commission Staff Working Document, ‘Analysis of the application of directive 2004/48/EC of the European Parliament and the Council of 29 April 2004 on the enforcement of intellectual property rights in the member states’, SEC(2010) 1589 final.
- Where the Court ruled that a member state law cannot impose an absolute bar on the disclosure of leniency materials.
- Final infringement decision is defined as an infringement decision of a competition authority or review court that can no longer be reviewed.
- The same does not apply to decisions of the Commission or member state authorities that declare binding commitments that a company has given under Article 9 of Regulation 1/2003 (or national equivalents), as such ‘commitment decisions’ do not include a finding of infringement.
- In addition, the Commission has published guidance (in the form of a communication and a ‘Practical Guide’) on quantifying harm to assist national authorities and courts.
- The draft directive explains that, subject to the EU principles of effectiveness and equivalence, it is a matter of member state law to determine the shares of responsibility of the different infringers.
- UK government, Department for Business Innovation and Skills, BIS/13/501 Private actions in competition law: a consultation on requirements in a specific fact situation.