Part III The Legal Framework, 9 Damages

This chapter assesses damages actions for competition infringement. The Damages Directive sets out a common legal basis across the EU for the right of those harmed by a competition infringement to sue and quantification of damages. It has been transposed into the UK and incorporated as Schedule 8A of the Competition Act 1989. The Damages Directive gives the national courts the power to estimate the overcharge; requires the European Commission to issue guidelines on the quantification of overcharges and on ‘pass-on to’; and advises that the national courts can request assistance from a willing national competition authority where appropriate to determine quantum. In English law, the position is that damages are compensatory and aim to place the victim in the position they would have been had they not been injured so far as monetary compensation can. There are several heads or types of damages that have so far been claimed: overcharge damages; lost volume or lost profit damages; run-on damages; umbrella damages; cost-based damages; future losses, lost chance, and lost opportunity damages; and aggregate damages in collective actions.

Part IV Measurement, 16 Legal Issues with Statistical Evidence

This chapter examines some of the legal and evidential issues surrounding statistical evidence. Courts are wary of statistical analysis and treat it as complex and difficult to reconcile with legal methods of determining damages based on documentary evidence. Indeed, the problem of estimated averages can conflict with the court’s approach. Moreover, there are statistical, economic, and legal issues surrounding statistical significance. The general concern is that reliance on conventional statistical significance levels may not reflect the legal standard of proof. The court can be assisted by the Practical Guide and Pass-on Guidelines of the European Commission, but also the best practice guidance of competition authorities for the submission of economic evidence.

Part V Pass-On, 19 Economics of Pass-on

This chapter looks at the economics of pass-on. The economics of pass-on is an aspect of the economists' theory of cost incidence. This is the study of the way a cost or tax increase is shifted and distributed between producers, consumers, and factors of production. It shows that the legal and economic incidence of a cost can differ radically and often in an unexpected way from its initial incidence. The extent of pass-on and any associated volume effect will depend on a range of factors including the nature of the overcharge; the demand and supply conditions; the market structure; and the pricing policies adopted by purchasers. The volume effect generates two losses: lost profits and the deadweight loss. Collecting all these losses together, full compensation requires that the direct purchasers as a group receive damages for the overcharge plus lost profits on the sales not made, minus the amount passed-on.

Part I Cartels in Context, 2 What Is a Cartel and What Does it Do?

This chapter discusses cartels in detail. A cartel is a secret agreement or arrangement between firms or individuals who would otherwise compete to increase their profits by manipulating the market. There are three general types of illegal cartels: sellers’, buyers’, and bid-rigging cartels. A suppliers’ or sellers’ cartel is where a group of firms who would have otherwise competed agree to increase the selling price of the inputs, intermediate and/or final goods, and services they sell. Meanwhile, a buyers’ cartel is where a group of buyers who would otherwise have competed agree to reduce the prices they pay for the goods and services they purchase. A bid-rigging cartel is when sellers who would otherwise compete secretly agree to raise prices and other terms to those who acquire their products or services through a tendering or bidding process. However, there are also legal cartels such as export cartels. Ultimately, the main abuse in cartels is charging a price different from that which would have been charged in the absence of the collusive arrangements.

Part V Pass-On, 21 Proving Pass-on

This chapter addresses the difficulty of establishing pass-on. Indeed, estimating pass-on is difficult and often impossible. Even where estimates of the pass-on rate can be generated, estimates of the overcharge are still required to quantify the amount of pass-on. For indirect purchasers, this will add to the difficulty because they may not have the necessary data and knowledge of successive upstream markets. There is also uncertainty to the standard of proof and evidential burden required to establish credible pass-on rates. However, there are a range of approaches that can be used to estimate or quantify the pass-on rate, which are set out in the European Commission’s Pass-on Guidelines. These include documentary evidence on firms’ pricing policies; economic theory/simulations; evidence on the way the direct and indirect purchasers have passed on cost increases in the past, arguing that they would react similarly to an overcharge; third party research on the way the industry has been passed on in the past; and statistical approaches either using multiple regression analysis, time series analysis, or event studies. The volume effect can be estimated using similar approaches although the Pass-on Guidelines suggest multiple regression analysis and the ‘elasticity approach’.

Part VI The Legal Process, 22 Expert Evidence

This chapter explores expert evidence in English courts. Economists are used as experts, together with accountants, in competition damage cases to give opinion evidence on competition issues and quantification of damages. Experts have a duty to the court which overrides that to their clients to give independent and objective evidence. In England and Wales, there are strict rules regarding expert evidence in court. They are governed by expert rules and the rules of evidence. The chapter then details the process and the role played by experts in competition litigation. Litigation is an uncertain affair with no guaranteed outcome. Experts have a responsibility and legal duty to prepare a professional report and give evidence under oath at trial. Where an expert has been negligent and not fulfilled their duty to the court, they may be responsible for the costs incurred by the other side in dealing with their defective evidence.

Part II Economic Framework, 5 Economics of Overcharges

This chapter details some basic economics on how a sellers’ cartel sets its prices and volumes, and the losses these generate. In any damage action, the claimant must quantify the prices and volumes in the absence of the cartel. These are referred to as the ‘counterfactual’, ‘but for’, or to use the term in the Damages Directive, the ‘non-infringement’ prices and volumes. Overcharge, volume, and efficiency losses depend on demand and supply conditions, market structure, cost structure, and barriers to entry. The size of the overcharge and volume effect depends on the assumed counterfactual or non-infringement benchmark. If the benchmark is a competitive market, the losses will be largest. However, if the non-infringement situation are prices that would have been charged in a more concentrated market, then the overcharge and volume effects will be smaller.

Part V Pass-On, 20 The Law on Pass-on

This chapter assesses the law on pass-on. Pass-on is key to the compensatory objective of antitrust damages. It ensures that claimants along the supply chain are only awarded their losses and not part of the overcharge passed-on in higher charges to their customers. Yet allowing pass-on does not avoid overcompensation and if applied alone would likely ensure that the claimant is under-compensated. This is because pass-on and lost sales are intimately intertwined, at least from an economic perspective. Thus, irrespective of whether pass-on is allowed or disallowed, the claimant suffers an additional loss of profits on the sales not made because its prices are now higher. The Damages Directive allows for a lost profit claim but leaves this to the national laws of the Member States. This is no doubt a policy decision to focus on the prospect of over-compensation rather than the legal principle of full compensation. The European Commission’s Practical Guide and the Pass-on Guidelines on the relationship between pass-on and lost profits due to reduced sales is explicitly recognized.

Part VI The Legal Process, 24 Costs, Funding, and Settlement

This concluding chapter examines some aspects of the costs, funding, and settlement of damage claims in the UK. The costs of bringing a claim can be high. The most expensive jurisdiction is England, but other procedural rules counterbalance this expense to make suing in England attractive. In some jurisdictions, reforms have been put in place to reduce litigation costs such as conditional fee arrangements and damage-based agreements that share the risks between claimants and their lawyers. After the event insurance (ATE), third party litigation funding, and lawyers’ contingent fee arrangements all reduce the costs and risks associated with litigation. However, very few civil actions go to trial and most are settled out of court through direct negotiations among the parties or through mediation or arbitration.

Part IV Measurement, 11 Overview

This chapter provides an overview to the issue, methods, and guidance on the quantification of cartel damages. The core of any damage claim are the price overcharges. The empirical techniques which can be used to estimate overcharges (and pass-on) are set out in the European Commission’s Practical Guide. There are four approaches to quantification: before and after; yardstick; cost and margin analysis; and economic theory. One or more of three quantitative techniques can be used to apply these methods: price and financial analysis; statistical analysis; and simulation models. In considering the methods used to estimate overcharges and lost profits, there are several considerations which recur and will often prove critical to a damage claim. The two most important are (a) the impact of non-cartel factors on prices; and (b) accurately determining the cartel period.