New EC guidelines reshuffle the passing-on game - The European angle
On 1 July 2019, the European Commission (the Commission) adopted guidelines designed to provide national courts with guidance in estimating the share of overcharges based on cartel infringements which was passed on to indirect purchasers: the "Passing-on Guidelines" (the Guidelines). This followed a consultation process launched in July 2018 during which interested parties were invited to submit their views and comments on the draft Guidelines.
Without any major shift from the draft version, the Guidelines provide a framework and further mechanisms that should be borne in mind by any party involved in damages claims in the EU. Although the Guidelines focus on horizontal cartels, which currently make up most of the competition damages claims in Europe, the tools may very well apply to vertical restraints and abuse of dominance cases too, subject to appropriate adjustments.
Whilst neither binding on national courts nor altering existing EU or national law, the Guidelines should nevertheless be considered as a "reference source for good practice" (based on Article 16 of the Damages Directive), not only by national courts, but by all parties. They complement the Practical Guide on quantifying harm in actions for damages based on breaches of Article 101 or 102 TFEU, and accompany the Communication from the Commission on quantifying antitrust harm in a damages action. As the Practical Guide sets out the existence and extent of the initial overcharges, and the new Guidelines address the passing-on of those overcharges, they should be read together.
Why are the passing-on guidelines welcome in the private enforcement arena?
Private enforcement in antitrust law is a relatively new field in the EU legal regime, and due to the lack of national court judgments dealing with quantification of damages in these cases, the quantification exercise in such cases is a complex exercise for the parties themselves as well as for any court.
In order to ensure that the appropriate level of compensation is obtained at different levels in the supply chain, the Guidelines describe and explain the main principles, by reference to the legal context and relevant economic theory that may help all parties involved to deal with this issue and understand the structure and consequences of passing-on, including its flip side: the volume effects.
In this article, we discuss the opportunities and risks arising from the Guidelines for each relevant party: cartelists may invoke passing-on defence as a 'shield', indirect purchasers may use the passing-on argument as a 'sword', whilst direct purchasers may have an interest in weighing the risks of both arguments.
1) Using passing-on as a shield
From the perspective of a cartelist, the Guidelines may appear mostly beneficial. The role of passing-on is strengthened and a common assessment basis is established for use across the different European jurisdictions, aimed at reducing the risk of conflicting decisions and thereby also the risk of over-compensation.
Managing parallel proceedings
In paragraph 25 et seq. of the Guidelines, the possibility of parallel claims against a cartelist from different levels in the supply chain is discussed. Here the Commission highlights that the national courts should seek to avoid over or under-compensation. The Guidelines point to different procedural means to achieve this, including staying proceedings to await judgement(s) in other case(s), joinder of claims, third-party notices and interventions.
However, as every Member State has its own unique procedural framework, the avoidance of over-compensation or under-compensation via these mechanisms may be difficult to achieve. For instance, in Germany there are 24 different first-instance courts, which are competent to hear cartel damages claims, making it complex for the courts and parties to track the various pending proceedings even within that single Member State. In contrast, in Member States such as Sweden, where there is only one national court (Patent och Marknadsdomstolen) with jurisdiction for all cartel damages filed in the entire country, it will inevitably be easier to follow parallel proceedings and take them into consideration.
Staying proceedings, thereby delaying them, may be prima facie appealing for a cartelist. However, the lapse of time would ultimately be reflected into any interest calculation which the cartelist will need to pay on top of damages, and which can make up a substantial, and increasing, part of the damages owed.
The Guidelines also mention joinder of claims and interventions as methods to avoid under- and over-compensation. These remain, however, subject to national procedural law. As the Guidelines do not specify how to use them, the effectiveness of this procedural mechanism remains to be seen.
The burden of proof
A further point of practical relevance emphasized in the Guidelines is the need for disclosure to overcome information asymmetry between claimants and defendants. In general, the cartelist (defendant) is unlikely to receive disclosure requests in relation to passing-on as it is unlikely to possess relevant documentation or information, but may well seek this disclosure from the (claimant) purchaser. In this context, the Guidelines provide guidance for national courts when using their discretionary power within the framework of the principle of proportionality, and emphasise the very need for disclosure to the benefit of the cartelist.
When it comes to the national courts’ power to estimate damages, the Guidelines explicitly state that courts cannot set too high standards regarding evidence needed, in accordance with the effet utile principle. Opposing parties obviously have diverging interests as to what the adequate standard of proof should be in that respect, but a cartelist’s own interest may vary depending on the identity of the claimant: a lower standard of proof when it comes to a direct purchaser claim, but a higher standard in a claim by an indirect purchaser. The courts must consider this when determining where to set the bar in any given case.
2) Battlegrounds or double-edged sword for the direct purchaser
Although the focus of the Guidelines is on proceedings between cartelists/indirect purchasers, they also impact direct purchasers. Based on the methods and tools presented, further possibilities to claim damages arise, and at the same time, the direct purchaser must also contemplate further risks resulting from any downstream claims.
Further economic effects to refer to
As mentioned above, the Guidelines are the first official Commission document that explicitly acknowledges non-price effects and volume effects as possible legal grounds for compensation claims. Non-price effects tend to impact innovation and/or quality. Although both effects tend to be harder to evidence, they do provide an additional legal ground for damages claims for purchasers at each level of the supply chain, but particularly for a direct purchaser.
Further, the lost profit resulting from fewer sales can be a possibility for a direct purchaser to claim damages despite the presence of passing-on effects. These so-called 'volume effects' refer to the negative impact that a seller (here: direct purchaser) may face when selling cartelized goods. Typically, it is the reduction of demand caused by the fact that fewer of the concerned products are bought due to the overcharge. The more sensitive demand reacts to a price increase (high demand elasticity), the higher the volume effect will generally be. As stated in paragraph 4 and 16 of the Guidelines, courts are directly encouraged to estimate volume-based damages as well and it will be interesting to analyse how they will achieve this. In addition, volume effects may arise based on non-price cartels, but unfortunately the Guidelines fail to address these effects specifically.
Complexity resulting from the nature of products and portfolios
Besides the possibility to claim damages based on volume effects, the direct purchaser may very well want to estimate the level of any downstream pass-on before filing a claim.
As the Guidelines explain, the passing-on effect depends on how much impact the cartelized product has on setting the price of the final product. If the final product is complex and consists of a large number of components, the impact of a single cartelized component on the final price might be low. In addition, complexity arises when the direct purchaser also sells substitutes or complementary products of the cartelized good. For example, a distributor of widgets may consider passing-on the overcharge charged by the widget manufacturer to its customers. But if it also sells its own products (blodgets), which are complementary products to the widgets, it is likely that its sales volume regarding the blodgets will decrease by the same proportion as the decrease in the sales volume of widgets due to the overcharge. Hence, the distributor may not pass-on the overcharge, irrespective of the characteristics of the widget industry. In contrast, if the direct purchaser sells substitutes that are not affected by an 'umbrella' effect, the likelihood of passing-on may increase, as the direct purchaser will gain additional profits based on the increased sales of its (non-cartelized) substitutes. Admittedly, the relevant tools and quantification methods are only addressed at high level by the Guidelines, which may make it difficult for courts to assess such scenarios. Even the passing reference to this issue, however, underlines the complexity of a proper analysis, and shows that a "one size fits all" approach would not be suitable.
One interesting scenario that the Guidelines did not mention in their draft, but which is now included, is the idea that the passing-on rate may vary over time. For instance, the direct purchaser may pursue a specific price strategy during the early years of the cartel period. However, if the cartel period is sufficiently long and the prices do not drop, the direct purchaser may revise its strategy to incorporate the overcharge in its pricing. Hence, the passing-on rate will increase over time. Again, potential estimation methods to account for that effect are not covered by the Guidelines. But this approach may be used by direct purchasers to demonstrate that the passing-on defence cannot – at least not fully – be successful.
Take-aways for the direct purchaser
In sum, these considerations underline the challenges of choosing the right methods and scope of data collection to meet the respective courts' requirements. A direct purchaser needs to consider the stakes of its own claim, including the need for disclosure in the context of the pass-on defence raised by cartelists. But direct purchasers must also be alert to parallel proceedings brought by indirect purchasers, and the risk of being drawn into further proceedings, e.g., through intervention, as the direct purchaser may need to join proceedings to protect its own position, and prevent a court from awarding damages to the indirect purchaser on the basis they have been passed-on by the direct purchaser. In turn, questions may arise as to how much (confidential) information the direct purchaser wants – or might be required – to disclose to its competitors, suppliers and customers. In that context, the Commission’s draft Communication on the protection of confidential information for the private enforcement of EU competition law by national courts may be another welcome instrument, to show national courts, and parties, that adequate protections may be put in place to protect confidential information whilst progressing damages claims.
On the other hand, the Guidelines underline the need to consider volume effects, thereby placing emphasis on the potential damages suffered by direct purchasers which must be compensated.
3) The "sword" for the indirect purchaser
The perceived complexity of quantifying indirect purchasers' damages should not prevent them from obtaining compensation, in circumstances where they have indeed suffered loss as a result of the operation of a cartel. In particular, the passing-on defence traditionally advanced by cartelists in defending claims brought by their direct customers clearly recognises the fact that indirect customers may very well themselves suffer prejudice: if compensation of a direct purchaser must be reduced to account for the fact that it was able to mitigate its loss by increasing its output prices, then this should not be for the benefit of the cartelist, but for the purchaser(s) further down the supply chain.
Passing-on over the entire supply chain?
Given the rebuttable presumption introduced in the Damages Directive that indirect purchasers suffer harm because of an overcharge on products or services they procure, the Guidelines outline the scenarios where passing-on might occur.
However, it is interesting to point out that the Damages Directive and the Guidelines remain theoretical in defining the "indirect purchaser". On the one hand, they recognise the fact that an overcharge may be passed on down an entire supply chain up to the final consumer; but on the other hand, all examples provided focus on the first indirect purchaser of a cartelized product, at the risk of over-simplifying the position.
In that context, depending on the complexity of the goods or services, a variety of factors may affect input prices and ultimately the product or service price. This has several consequences. First, in the context of industries with a high occurrence of cartels (for instance the automotive sector), how is an indirect purchaser to distinguish the overcharge and pass-on attributable to a given cartelist? Further, an indirect purchaser needs to substantiate a pass-on scenario over the entire supply chain, which may result in a complex exercise when it comes to accessing relevant evidence, particularly when the claim involves a component of a complex, for example, an automobile tire containing a price-fixed rubber chemical or a grocery product containing a price-fixed ingredient. The Guidelines fail to grapple with these issues in meaningful detail, thereby leaving potentially many indirect purchasers to start from first principles when considering their damages assessment and the evidence needed to support it.
The challenge of accessing relevant evidence
Understanding the general economic theory of passing-on in relatively straightforward cases, such as those presented in the Guidelines, is nevertheless key for indirect purchasers. It will provide them with a framework to assess how courts may evaluate quantitative and qualitative evidence, the relevance of any requested disclosure, whether or not a required standard of proof is met, and ultimately the credibility of any expert report. The main element being precisely that evidence is not available to the indirect purchaser to perform an analysis.
In that respect, the Damages Directive acknowledges the fact that an indirect purchaser will need to obtain disclosure from the cartelist or from third parties. The Guidelines underline that the extent of disclosure required to gather relevant information must be proportionate to the overall damages claim. The task for the indirect purchaser is however very high, and two-fold: first, establishing the existence and level of overcharge; and second, the share of how much was passed-on. The evidence required for each of these steps does not lie with the same party: whilst it is usually considered and accepted that cartelists would tend to control data and documents relevant to the assessment of the overcharge, it tends to be the direct customer (and any indirect customers upstream of the indirect customer claimant) who controls evidence relevant to the quantification of pass-on. The complexity (and cost) of obtaining disclosure from so many third parties can be significant.
The Guidelines furthermore set out and explain key factors for the economic assessment of passing-on, emphasising the nature of input costs and product demand, the intensity of competition in the customers’ markets, as well as price adjustment costs or buyer power. Finding the right balance between a proportionate approach to disclosure and the stakes of a claim may quickly prove challenging. Whilst market reports may be available to the indirect purchasers, quantitative evidence, at the heart of the methodologies described in the Guidelines, may be very broad (if, for instance, there are several levels in the supply chain or when the cartel involves only only a component or ingredient in a product ) and will not necessarily be within the indirect purchaser claimant’s control.
Given the time and cost of providing disclosure, as well as their own potential claims and any confidentiality concerns, it can be reasonably anticipated that upstream purchasers will be unwilling (and, in fact, strongly oppose) to provide extensive disclosure in proceedings to which they are not a party. This may add additional hurdles to the indirect purchaser’s claim, including in intensifying parallel disclosure litigation.
A wait-and-see approach?
Another interesting aspect of the Guidelines relates to the emphasis put from the outset on the need for national courts to be mindful of parallel proceedings before other courts, and availability of procedural means to ensure purchasers are not over- or under- compensated. Indirect purchasers may indeed be tempted, for instance from a cost-management perspective or to avoid a confrontational approach against their direct suppliers, to adopt a passive approach vis-à-vis claims brought by upstream purchasers, waiting for the outcome of these claims and rulings on the extent of pass-on. However, this would not be a risk-free approach, considering the large number of damages claims that settle before trial and the duration of proceedings which may lead to the indirect purchaser’s claims becoming time-barred.
The various methods and tools presented by the Guidelines make it a helpful guidance for all stakeholders in the private enforcement area in the EU. The Guidelines serve an educational purpose for national courts, but also highlight, in developing certain methodologies, the complexity and variety of economic effects that a cartel may have, which again may increase the difficulty for both direct and indirect purchasers to successfully claim for damages. As there is little precedent on the quantification of volume effects and a lack of detailed guidance of non-price effects, one can expect this to keep triggering substantial debate and uncertainty over the next years. This may lead to divergent decisions among national courts when quantifying damages, contradicting the underlying harmonization idea behind the Guidelines.
It remains to be seen how the theories set out in the Guidelines will be implemented by national courts; and how the availability of (and costs of accessing) evidence will be weighed. The Commission is presently consulting on disclosure in the context of cartel damages claims, and further guidance on that can be expected in due course. How all of this is received, and interpreted, by the national courts, which are the lynchpin of the effectiveness (or otherwise) of the damages claims they must deal with, will ultimately determine the usefulness of the Guidelines as the Damages Directive regime unfolds.
 Commission, Guidelines for national courts on how to estimate the share of overcharge which was
passed on to the indirect purchaser http://ec.europa.eu/competition/antitrust/actionsdamages/passing_on_en.pdf
 See our previous comments on the draft Guidelines: https://www.hausfeld.com/news-press/harmonizing-the-decision-making-practice-regarding-pass-on-a-first-draft-by-the-european-commission?lang_id=5
 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.
 Commission, Practical Guide Quantifying Harm in Actions for Damages Based on Breaches of Art. 101 or 102 of the treaty on the functioning of the European Union, http://ec.europa.eu/competition/antitrust/actionsdamages/quantification_guide_en.pdf
 Commission, Communication from the Commission on quantifying harm in actions for damages based on breaches of Article 101 or 102 of the Treaty on the Functioning of the European Union https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013XC0613(04)&from=EN.
 This may become relevant in practice as non-price collusions are increasingly punished: see, e.g., Qualcomm v Apple. The basic argument would be that if innovation stagnates (because of a non-price cartel), sales volume may decrease as there are fewer potential purchasers willing to pay for the products impacted.
 See Commission, Guidelines for national courts on how to estimate the share of overcharge which was
passed on to the indirect purchaser, para 124.
 See Commission, Guidelines for national courts on how to estimate the share of overcharge which was
passed on to the indirect purchaser, para 184.
 Umbrella damages are damages caused by companies which are not a part of a cartel, but these companies could because of a cartel in their market which distorted the price formation demand higher prices as compared to what would have been the case in a fully competitive market – see the European Court of Justice, Judgment in Kone, Case C-557/12; http://curia.europa.eu/juris/document/document.jsf?text=&docid=153312&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=256039%20
 Consultation open from 29 July 2019 to 18 October 2019, http://ec.europa.eu/competition/consultations/2019_private_enforcement/index_en.html
 Damages Directive, Article 14(2): In the situation referred to in paragraph 1, the indirect purchaser shall be deemed to have proven that a passing-on to that indirect purchaser occurred where that indirect purchaser has shown that: (a) the defendant has committed an infringement of competition law; (b) the infringement of competition law has resulted in an overcharge for the direct purchaser of the defendant; and (c) the indirect purchaser has purchased the goods or services that were the object of the infringement of competition law, or has purchased goods or services derived from or containing them. This paragraph shall not apply where the defendant can demonstrate credibly to the satisfaction of the court that the overcharge was not, or was not entirely, passed on to the indirect purchaser.
 Damages Directive, Article 2(24): a natural or legal person who acquired, not directly from an infringer, but from a direct purchaser or a subsequent purchaser, products or services that were the object of an infringement of competition law, or products or services containing them or derived therefrom.
 On 5 March 2019, the Commission noted that its decision against Autoliv and TRW in Case AT.40481 - Occupant Safety Systems II brought the total amount of Commission fines for cartels in the automotive sector to €2.15 billion. Brussels, 5 March 2019, Antitrust: Commission fines car safety equipment suppliers € 368 million in cartel settlement.
 Damages Directive, Article 14(1): Member States shall ensure that, where in an action for damages the existence of a claim for damages or the amount of compensation to be awarded depends on whether, or to what degree, an overcharge was passed on to the claimant, taking into account the commercial practice that price increases are passed on down the supply chain, the burden of proving the existence and scope of such a passing-on shall rest with the claimant, who may reasonably require disclosure from the defendant or from third parties.
*Amandine Gueret is an Associate in London, Dr. Lisa Hamelmann is an Economist and Legal Project Manager in Düsseldorf and Mikael Treijner is an Associate in the Berlin office.