The EU Damages Directive for competition law claims

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

After nearly a decade of consultations and debate the much awaited "Directive 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"Damages DirectiveDirective 2014/104/EU ("") has today been published in the EU Official Journal (see ). Member States will now have until 27 December 2016 to transpose the Directive into national law.

Key changes introduced EU-wide in the Directive include:

• the establishment of a five-year minimum limitation period for bringing a damages action;
• strict new rules on disclosure; and
• the codification of the so-called passing-on defence.

The Directive seeks to harmonise certain procedures across the European Union for claimants seeking to bring damages actions for harm caused by businesses which have been found to have infringed competition law. The Directive reflects what EU law-makers hope is an appropriate balance between effective public enforcement of competition law by the European Commission and national competition authorities, and access to private enforcement of competition law in national courts. Paving the way for follow-on damages, the Directive has the potential to increase liability substantially for those businesses found to have infringed competition law. This means it is more important than ever for businesses to ensure that all of their operations are competition law compliant.

Below we set out an overview of the key provisions of the new Directive, followed by an analysis of what the Directive will mean for businesses operating in the European Union.

The right to full compensation

Key to the Damages Directive is the principle that anyone who has suffered harm caused by an infringement of EU or national competition law has the right to claim full compensation from the infringing business(es). This is a principle which is currently unevenly enforced across Member States and has led to claimants 'forum shopping' for the most favourable jurisdiction in which to bring a claim (subject to rules on standing to bring actions). The Damages Directive stipulates that victims of an infringement must have the right to claim full compensation covering compensation for actual loss, loss of profit and interest.

The Directive clearly states that both direct and indirect purchasers of the goods or services sold by a business found to have committed a competition law infringement are entitled to claim compensation. Accordingly, both a cartelist's direct customers and those customers to whom products are subsequently re-sold by the customers can claim against the cartel members. This is an important step for indirect purchasers, who previously struggled to prove that they had standing to bring such a claim in many jurisdictions across the EU.

In order to be successful in its claim for compensation an indirect purchaser must show that it has suffered loss as a result of the infringement. In doing so, it can rely on a rebuttable presumption included in the Directive which states that an indirect purchaser will be presumed to have suffered loss where:

• the defendant has committed an infringement of competition law;
• the infringement resulted in overcharge for a direct purchaser of the defendant; and
• the indirect purchaser purchased the goods or services subject to the infringement from the direct purchaser.

Proof of infringement

To further facilitate the bringing of damages actions, the Directive clarifies the status of infringement decisions by national competition authorities. A final infringement decision of a national competition authority is binding on the national court of the same Member State for the purposes of a follow-on damages claim. An infringement decision of a national competition authority in a different Member State to that in which the damages claim is brought serves as prima facie evidence that an infringement occurred and the decision can be assessed along with any other evidence provided to the court. It is already a long-standing principle of EU law that national courts cannot take decisions running counter to decisions of the European Commission, and infringement decisions of the Commission will continue to bind national courts.

Whilst some Member States such as the UK already follow a rule that the domestic competition authority's decisions are binding, the introduction of a presumption in relation to other countries' decision could assist claimants in selecting a convenient jurisdiction.

Limitation period

Under the new Directive, claimants must be given a period of at least five years to bring their claim. This period may not start before the infringement has ceased and the claimant knows, or could be reasonably expected to know:

• of the behaviour and the fact that it constitutes an infringement of competition law;
• that the infringement has caused harm to the claimant; and
• the identity of the infringer.

The Directive also provides for the limitation period to be suspended where a competition authority launches an investigation or proceedings relating to the infringement which is the subject of the damages action. The suspension should remain in place for at least a year following a final decision or the termination of any such proceedings.

These rules potentially open the way to claims covering decades of competition law infringements.

Joint and several liability

Under the Directive undertakings which have infringed competition law through joint behaviour (such as cartels) are to be held jointly and severally liable for the entire harm caused by the infringement (with a limited exception for small and medium sized enterprises). This means that a claimant at its election can bring a claim against just one or against several of the infringing entities until the claimant has been fully compensated. For infringers, this means that even if they are not sued by a claimant in the first instance there is still the possibility that another co-infringer may seek to recover a contribution for its share in the infringement.

However, the position is different for immunity recipients - a position the Commission has maintained is essential to preserve the effectiveness of its leniency programme. Under this programme the Commission offers immunity from fines to the first member of a cartel to "confess" to the infringement. Now, immunity recipients receive extra protection; in the event that an immunity recipient is sued for damages with respect to its activity in the cartel, its liability is limited to the harm it caused to its own direct and indirect purchasers and providers, unless full compensation cannot be obtained from the other entities involved in the infringements - in which case the immunity recipient will remain fully liable (thereby protecting the right to full compensation).

Disclosure

The extent to which documents submitted to the Commission during an investigation should be protected from disclosure was one of the most debated topics as the Directive progressed through the legislative procedure. The level of disclosure permitted is seen as pivotal to achieving effective private and public enforcement of competition law. A balance must be struck between, on the one hand, creating a regime in which undertakings subject to an investigation remain confident that confidential documents disclosed to the Commission will not automatically fall into the hands of would-be claimants, and on the other hand ensuring that measures are put in place to ensure that claimants are not put at a disadvantage by "information asymmetry" - because defendants have a full knowledge of potentially incriminating facts which are not available to claimants.

The Directive stipulates that where a claimant has made a reasoned justification supporting the plausibility of its claim, national courts must be empowered to order a defendant or a third party to disclose relevant evidence in their control. Specifically, national courts must be able to order (proportionate) disclosure of specified items of evidence or relevant categories of evidence, which should be defined as precisely and narrowly as possible. Where this requires the disclosure of confidential information, national courts must have at their disposal measures to protect such information, such as the power to establish a "confidentiality ring", under which only specified individuals (such as legal advisors) can access the information.

There are two limitations to the power to order disclosure:

• Leniency statements (the cartelist's "confession") and submissions aimed at settlement of a case are to be granted absolute protection from disclosure, meaning that they can never be disclosed in damages actions.
• Information prepared specifically for the proceedings of a competition authority or prepared by the competition authority to send to the party in the course of proceedings, as well as withdrawn settlement submissions, are granted temporary protection from disclosure and cannot be disclosed until the competition authority's proceedings are closed.

Member States must ensure that national courts have the power to impose penalties to guarantee compliance with disclosure orders.

Passing-on defence

The passing-on defence provides a defendant in a cartel damages action the opportunity to argue that a claimant who is a direct purchaser has passed on to its customers the whole or part of the overcharge caused by the cartel and therefore that the claimant should not in fact be entitled to damages, or should be entitled only to a reduced amount of damages to reflect the level of harm actually suffered. Currently, this much-debated defence is not available uniformly across Member States, with some not recognising the defence at all.

The Directive codifies the defendant's right to invoke the passing-on defence. Once transposed into national law defendants in follow-on damages actions will be able to raise the defence that a claimant has passed on the whole or part of the overcharge. To build its defence the defendant will be able to require disclosure from the claimant and third parties. The burden of proof will fall on the defendant seeking to rely on the defence.

Quantifying harm

The final hurdle in a damages claim is the quantification of harm. Once a claimant has established that it has suffered harm, the Directive states that national courts should be empowered to quantify the harm suffered by that claimant where it is practically impossible or excessively difficult for the claimant to quantify harm on the basis of the evidence. It also provides that national competition authorities should be ready to assist national courts with this task upon request. In the case of damages in cartel cases, the Directive introduces a rebuttable presumption that a cartel causes harm (though not how much harm). This presumption should serve to reduce claimant's costs by removing the requirement to prove that a cartel caused higher prices.

Where a national court is called upon to determine the quantum of harm it must ensure that the compensation awarded does not exceed the overcharge harm at each level of the supply chain - this should be done by taking account of all damages actions related to the same infringement, including those brought by claimants at different levels of the supply chain. This is undoubtedly likely to pose significant practical challenges for the courts. The Commission intends to publish guidance for national courts to assist in the quantification of harm suffered by indirect purchasers.

Consensual dispute resolution ("CDR")

The guiding principle of the Damages Directive is to ensure that all victims of infringement of competition law can enforce the right to claim full compensation from the infringing business(es). With that in mind, it is unsurprising that the Directive seeks to promote the use of CDR, which is generally considered both a cheaper and faster way of resolving disputes. CDR may involve out-of-court settlements, arbitration, mediation or conciliation. The recitals to the Directive encourage parties to litigation to use these CDR mechanisms and to include as many victims and infringers as possible in the process.

In order to ensure effective use of CDR the Directive provides that national limitation periods should be suspended when parties are engaged in CDR. Equally, national courts will be granted discretion to suspend proceedings for up to two years where the parties are engaged in CDR. To further promote the use of CDR and to prevent settling co-infringers from being placed at a disadvantage, they will not be held jointly and severally liable for awards of damages made against non-settling co-infringers, unless those co-infringers are unable to pay the compensation owed. To ensure that claimants are not overcompensated, national courts must take account of any consensual settlements relating to a particular infringement when making an award of damages.

What the Directive will mean for businesses operating in the EU

On the face of it the provisions set out in the Damages Directive should pave the way for follow-on damages actions by removing barriers which formerly might have prevented victims from seeking redress. Measures such as the clarification of the evidential value of infringement decisions and confirmation of the standing of indirect purchasers are positive steps forward in promoting the use of follow-on damages actions.

On the other hand, it is still to be seen whether claimants will be able to access the evidence they need to prove their claim. This is likely to depend on the extent to which national courts exercise the power to order disclosure. There is a risk that this will not be uniformly implemented across Member States, particularly with regard to those Member States which do not currently operate a formal disclosure process, such as the system already well-established in the UK. The same is true of the quantification of harm in complex cases - there will need to be a high level of initial engagement from the European Commission and national competition authorities so that quantification is calculated in an even manner across all Member States.

Only time will tell whether the Directive will open the floodgates to follow-on damages litigation EU-wide. What is clear, however, is that once the Damages Directive enters into force those found to have infringed competition law will find themselves at risk of substantially increased liability. This is a sentiment which was recently echoed by the Court of Justice of the European Union in the Kone case (C-557/12) in which the Court showed itself willing to extend the liability of infringers of competition law. The Court held that cartel members can be held liable for loss suffered by their competitor's customers, where that competitor - not a participant in the cartel - had autonomously raised its prices in order to adapt to distorted market prices resulting from the cartel.

This increased exposure to liability may push companies being investigated by competition authorities towards settling cartel investigations or giving commitments with respect to other antitrust investigations, rather than risking a final infringement decision which could be used as evidence in a follow-on damages claim. There is a risk that settlement agreements and commitment decisions, whilst important tools in the armoury of a competition authority to ensure speedy resolution of potentially anticompetitive behaviour, may come to be viewed as a "get-out-of-jail-free" card (or if not free, at least more cheaply) for companies seeking to avoid costly fines and follow-on damages actions. Were this to become the case, claimants would increasingly be denied all-important final infringement decisions and some of the benefits of the new Directive would be undermined (whose impact is perhaps less than in civil law jurisdictions).

For those companies based in the UK, in addition to the Damages Directive, proposals to reform private enforcement of competition law have been introduced to Parliament under the Consumer Rights Bill. This is making its way through the legislative process, and should enter into force on 1 October 2015. The changes in the Consumer Rights Bill mainly revolve around increasing the use of collective actions for breaches of competition law and also envisage an increase in the powers of the Competition Appeal Tribunal, the UK's specialist competition court. The changes proposed by the Consumer Rights Bill focus on making it easier for victims of infringements of competition law to bring damages actions and obtain the compensation. For companies at risk of having breached competition law the Damages Directive and the Consumer Rights Bill represent a double threat of increased liability to companies doing business in the UK. For more information on the proposed changes please see Olswang's article 'The Consumer Rights Bill and private enforcement of competition law'.

Whilst only time will tell whether the Damages Directive will be effectively implemented by all Member States and frequently used by claimants, it is clear that it is more important than ever for companies to ensure that their operations are competition law compliant.