The European Commission (“EC”) has recently published Guidelines for national courts on how to estimate the share of the overcharge caused by cartels which was passed on by direct purchasers to their customers (“Passing-on Guidelines”). The Passing-on Guidelines provide an extensive practical overview of the applicable legal context, the relevant economic theory and quantification methods for the concrete harm caused to claimants in litigation.
Antitrust follow-on litigation in a nutshell
Antitrust follow-on litigation is becoming increasingly important in EU competition law, as it allows direct, indirect and ultimate customers to receive compensation for harm caused by anti-competitive agreements or abusive behaviour. This damage can consist of concrete harm such as higher prices paid by these customers or lost profit. Affected parties have a right to full compensation for the harm caused to them. National courts of EU Member states are entitled to decide the level of compensation awarded to these affected parties to compensate them for their harm, provided that they can prove (i) the existence of an infringement, (ii) the harm they suffered and (iii) the causal relationship between the infringement and the harm.
The need for an effective legal framework
Generally, claimants will have no difficulties in proving the existence of an infringement before the appropriate national court, if there has been a decision of a relevant antitrust authority. However, the quantification of the economic harm suffered typically proves to be more complex and difficult. In this regard, national courts may apply divergent methodologies, which can lead to legal uncertainty for claimants.
In light of this, the Commission issued guidance in 2013 on quantifying harm in actions for damages and now the Passing-on Guidelines provide a more detailed legal framework and guidance on the question of how to quantify passing-on. In particular, the Passing-on Guidelines set out two scenarios in which national courts typically face issues estimating passing-on of overcharges and for which guidance might be useful.
- First, in the situation where a claimant can prove economic harm, the defendant is likely to argue that the claimant did not suffer lasting economic harm, as it was able to pass it on to its own customers (e. passing-on used as a shield).
- Second, indirect purchasers can argue that direct purchasers have passed-on the overcharge to them and, as a consequence, they have suffered the harm and have their own claim (e. passing-on used as a sword).
Main features of the Passing-on Guidelines
The Passing-on Guidelines provide a comprehensive overview for the quantification of passing-on related overcharges. In this regard, they first suggest that a counterfactual scenario should be adopted, i.e. a hypothetical situation comparing the situation in which the infringement took place; with a situation in which it did not take place. Second, the Passing-on Guidelines suggest a three-step assessment, measuring the (i) overcharge, (ii) the passing-on related price effect and (iii) the passing-on related volume effect of an infringement.
As such, it distinguishes two types of passing-on effects: (i) the price effect, i.e. the overcharge that has been passed-on by direct purchasers to their customers, resulting in a higher price paid by indirect purchasers (and reduced damages that can be recovered by direct purchasers); and (ii) the volume effect, namely the value of the sales by direct purchasers to their customers that is lost due to reduced demand caused by the increase in price. As there is an inherent link between the underlying price effect and volume effect, the estimation of both effects is important to quantify the total harm.
With regard to the quantification of passing-on related price effects, the Passing-on Guidelines provide three types of economic approaches to quantify the harm, namely, the passing-on rate approach, the simulation approach or the comparator-based approach. First, the passing-on rate approach analyses how previous changes in a firm’s cost have affected its prices before or after the infringement period. Second, the simulation approach implies that an economic expert will develop a model of competition at the stage of the distribution chain where the claimant is active, and simulate the effect of the relevant overcharge on the claimant’s profit during the infringement period. Finally, the comparator-based approach, which is said to be preferable, has the advantage of using real-life data observed on the same or a similar market and the method is commonly used by competition authorities in Europe. In summary, under the comparator-based method, the competitive parameters (e.g. prices or margins, loss of sales due to reduced sales) on the affected market during the infringement period are compared with the exact same market or a similar market, in either case absent the infringement. The Passing-on Guidelines also emphasise the usefulness of qualitative evidence (e.g. internal documents and witness evidence) in the assessment of price effects.
With regard to the quantification of passing-on related volume effects, the Passing-on Guidelines suggest either an elasticity approach or a comparator-based approach. Between these two approaches, the comparator-based approach is said to be preferable, as it is less demanding in terms of data requirements and assumptions compared to the elasticity approach. First, the elasticity approach estimates the volume effect by combining the price increase observed as a result of the passing-on related price effect with an estimate of the price sensitivity of the relevant demand. Second, the comparator-based approach will estimate the lost profit associated with the volume effect by multiplying the counterfactual margin, i.e. the margin achieved in the absence of the infringement, by the reduction in sales volumes stemming from the passing-on of overcharges. The potential weakness of this approach is that it rests on the assumption that the reference period or market is sufficiently similar, which is not easily verified.
The implementation of the Damages Directive (2014/104/EU) into EU Member states’ national law has led to an increase in antitrust follow-on litigation. In this respect, the Passing-on Guidelines provide an effective legal framework setting out non-binding best practices for national courts to assess the damage that can be claimed by those affected. This framework is useful as it provides legal certainty to claimants and allows courts to make a proper assessment of the potential harm, based on a sound economic analysis.