Making antitrust damages actions more effective in the EU: welfare impact and potential scenarios

Making antitrust damages actions more effective in the EU: welfare impact and

potential scenarios

FINAL REPORT

Done in Brussels, Rome and Rotterdam, 21 December 2007

Project Team:

Centre for European Policy Studies (CEPS) Prof. Andrea Renda (coordinator)

Prof. John Peysner Prof. Dr. Alan J. Riley

Prof. Barry J. Rodger

Erasmus University Rotterdam (EUR) Prof. Dr. Roger J. Van Den Bergh

Sonja Keske

Luiss Guido Carli (LUISS) Prof. Roberto Pardolesi Dr. Enrico Leonardo Camilli

Dr. Paolo Caprile

REPORT FOR THE EUROPEAN COMMISSION

CONTRACT DGCOMP/2006/A3/012

T ABLE OF CONTENTS

E

... 10 1 I

... 27

1.1 The Green Paper on Antitrust Damages and the upcoming

White Paper 33

1.2 Current development of private damages actions in European

member states 37

2 M

... 45 3 S

... 48

P

I: P

... 51 1 D

? ... 51

1.1 Private and public enforcement: face-off 56

2 A

EU ... 65

2.1 Can private enforcement achieve greater deterrence? 70

2.2 Private enforcement and corrective justice 77

2.3 Would enhanced private enforcement increase administrative

burdens? 80

2.4 Costs of enforcement and litigation: the case of the US 85

2.5 Macroeconomic impacts 89

2.6 Bringing competition policy closer to consumers 92

3 A

:

... 94

3.1 Estimating the social loss and welfare transfers induced by

cartels 94

3.2 Refinements 110

4 O

... 117

4.1 Impact Assessment 124

5 R

... 136

5.1 Settlement, litigation, and procedural rules 137

5.2 Enforcement and litigation costs 150

5.3 Reputational effects and risk-aversion 152

DAMAGES ACTIONS

... 155

6.1 Additional simulations 159

6.2 Macroeconomic impact of more effective antitrust damages

actions 164

6.3 Summary of findings 166

P

II: A

... 171 1 C

... 174

1.1 The plaintiff‘s incentive to sue: a simple model 175 1.2 The effect of fee shifting rules on corrective justice and

deterrence 176

1.3 Punitive or multiple damages 192

1.4 Contingency fees 201

1.5 Avoiding frivolous and unmeritorious suits 213

1.6 Impact assessment 216

1.7 Refinements 260

2 G

... 268

2.1 Definition of different types of group action and their

conformity with the legal systems of the Member States 268 2.2 Advantages, disadvantages and the design of group litigation 276 2.3 Specific problems related to the design of group litigation 284

2.4 Impact assessment 297

3 A

... 345

3.1 A brief comparison of civil law and common law procedural

disclosure rules 347

3.2 Impact assessment 357

3.3 Summary tables on access to evidence 406

4 D

... 412

4.1 Types of awarded damages 415

4.2 Impact assessment 416

4.3 Methods of calculation 441

5 P

-

... 457

5.1 Impact assessment 461

5.2 Further remarks 480

5.3 Refinements 481

5.4 Summary of the main findings 486

6 I

... 492

6.1 Theoretical issues and the current framework 493

6.2 Rebate on damages 501

6.3 Removal of joint liability for the applicant 515

7 L

... 533

7.1 The costs and benefits of limitation periods 535

7.2 Stand-alone actions 536

7.3 Follow-on actions 539

7.4 Conclusions 543

P

III: A

I

... 545 1 T

... 546 2 I

... 549

2.1 The ―no policy change‖ scenario 551

2.2 Assessment of Scenario 1 561

2.3 Assessment of Scenario 2 579

2.4 Assessment of Scenario 3 596

2.5 Assessment of Scenario 4 610

A

I – F

... 616

A

II – B

... 628

Table 1 – Damages awards by type of claim, 2004- 3Q2007 ... 42

Table 2 – Estimates on cartel detection rates ... 73

Table 3 – Informational contribution of private plaintiffs: the vitamin case ... 75

Table 4 – Size of the overcharge – early studies ... 98

Table 5 – Ex ante deterrence for a global cartelist, without EC private damages actions ... 101

Table 6 – Ex ante deterrence with EU private damages actions ... 103

Table 7 – Deterrence for a global cartelist ... 105

Table 8 – Impact of status quo, EU-wide cartels ... 107

Table 9 – Yearly impact of cartel private enforcement, with damage multiples (Euros) ... 109

Table 10 – Yearly impact of status quo, EU-wide and domestic cartels ... 111

Table 11 – Effect of industry mix of cartel on overcharge - all cartels ... 112

Table 12 – Effect of industry mix – modern international cartels ... 113

Table 13 – Effect of industry mix of cartel on overcharge in Europe and the US - all cartels ... 114

Table 14 – Effect of industry mix overcharge in Europe and the US – modern international cartels ... 114

Table 15 - Median Average Overcharges (in percent) by Year and Legal Status ... 116

Table 16 – Private actions in the Georgetown study, by type of plaintiff ... 118

Table 17 – Allegations in private actions in Australia and US ... 127

Table 18 – Probabilities of settlement and plaintiff‘s victory at trial ... 128

Table 19 – Simulation on yearly damage recovery for all types of infringement ... 135

Table 20 – Impact of beliefs and costs on settlement and plaintiff win rate ... 146

Table 21 – Estimated yearly recovery for all infringements (EU and domestic), according to damage multiple (Euros) and cost allocation rule ... 156

Table 22 – Yearly recovery for all infringements (EU and domestic), damage multiple and fee allocation for three different cartel detection rates (Euros) ... 158

Table 23 – Estimated yearly recovery by type of plaintiff, damage multiple and cost allocation rule ... 161

Table 24 – Estimated yearly recovery by type of plaintiff, double damages for cartels and cost allocation rule ... 162

Table 25 – Estimated yearly recovery by type of plaintiff, double damages

for cartels and cost allocation rule, plus prejudgment interest ... 163

Table 26 – Fee agreements, fee allocation and probability of success ... 213

Table 27 – Options on costs/rewards of damages actions ... 218

Table 28 – Zero option ... 224

Table 29 – Option 1a (double damages for cartel cases) ... 238

Table 30 – Option 1b (double damages for all cases) ... 239

Table 31 – Option 1c (decoupled damages, double for cartels) ... 240

Table 32 – Option 1d (decoupled damages for all cases) ... 241

Table 33 – Option 1e (NCA as amicus curiae) ... 242

Table 34 – Option 2a (one-way fee-shifting) ... 254

Table 35 – Option 2b (one-way fee-shifting and double damages for cartels)... 255

Table 36 – Option 2c (one-way fee-shifting and double damages for all cases) ... 256

Table 37 – Option 2d (one-way fee-shifting, decoupled damages, double damages for cartels) ... 257

Table 38 – Option 2e (one-way fee-shifting and decoupled damages) ... 258

Table 39 – Option 2f (one-way fee-shifting and amicus curiae) ... 259

Table 40 – Existing forms of group litigation in a number of Member States .. 295

Table 41 – Zero option ... 337

Table 42 – Opt-in collective actions ... 338

Table 43 – Opt-out collective actions ... 339

Table 44 – Opt-in representative actions ... 340

Table 45 – Opt-out representative actions ... 341

Table 46 – Mandatory representative actions ... 342

Table 47 – Joinder of parties and test cases ... 343

Table 48 – Joinder of claims ... 344

Table 49 – Harmonisation costs for option 2 – groups of countries ... 371

Table 50 - Percentage of US attorneys reporting specific effects of initial disclosure on the fairness of the outcome. ... 375

Table 51 – Initial disclosure and litigation expenses after the reform of the FRCP in 1993 ... 377

Table 52 - 80th Percentile of disclosure expenses, for respondents reporting any discovery expense (Willging et al., 1998) ... 380

(Hazen Genn survey, 1996), Commercial (N=106+102). ... 380

Table 54 – Harmonisation costs for option 3 – groups of countries ... 383

Table 55 – Assessment of average administrative burdens for option 2 ... 405

Table 56 – Zero option ... 406

Table 57 – Option 1 (Specific documents) ... 407

Table 58 – Option 2 (Classes of documents) ... 408

Table 59 – Option 3 (Initial Disclosure) ... 409

Table 60 –Option 6 (compared with Option 1 alone) ... 410

Table 61 – Option 7 (compared with Option 1 alone) ... 411

Table 62 – Option ―Harm-based‖ plus interest since harm occurred ... 453

Table 63 – Option ―Gain-based available in addition to harm-based‖ plus ―prejudgment interest since harm occurred‖ ... 454

Table 64 – Option ―harm-based‖ plus ―pre-judgement interests since infringement occurred‖ ... 455

Table 65 – Option ―gain based‖ plus ―pre-judgement interests since infringement occurred‖ ... 456

Table 66 – Option 1 (passing-on defence allowed, indirect standing allowed) ... 488

Table 67 – Option 2 (passing-on defence not allowed, indirect standing not allowed) ... 489

Table 68 – Option 3 (Passing-on defence not allowed, indirect standing allowed) ... 490

Table 69 – Option 4 (Passing-on defence not allowed, indirect standing allowed for claims to direct purchasers) ... 491

Table 70 – Option zero ... 530

Table 71 – Option ―Rebate on damages‖... 531

Table 72 – Option ―Removal of joint and several liability‖ ... 532

Table 73 – Selected scenarios... 548

Table 74 – Impact assessment of ―no policy change‖ ... 560

Table 75 – Impact assessment of scenario 1 ... 578

Table 76 – Harmonisation costs for scenario 2 – groups of countries ... 591

Table 77 – Impact assessment of scenario 2 ... 595

Table 78 – Impact assessment of scenario 3 ... 609

Table 79 – Impact assessment of scenario 4 ... 615

L IST OF F IGURES

Figure 1 - Cases by type and year, 2004-3Q2007 ... 41

Figure 2 - Number and Period of Settlements in the UK, 2000-2005 ... 43

Figure 3 – Partial equilibrium analysis and the social cost of monopoly ... 52

Figure 4 – Public and private enforcement ... 66

Figure 5 – Administrative Burden versus Administrative Cost ... 81

Figure 6 – Information obligations, data requirements and activities ... 82

Figure 7 – Government antitrust cases filed in US District Courts, 1980- 2004 ... 86

Figure 8 – Public and private filings on vertical restraints in the US, 1945- 2000 ... 130

Figure 9 – Optimal amount of private litigation with and without settlement ... 151

Figure 10 – Multi-stage litigation when each party bears own costs ... 188

Figure 11 – Multi-stage litigation and the loser-pays rule ... 189

Figure 12 – Multi-stage litigation and one-way fee-shifting ... 190

Figure 13 – Limitation periods in the EU25 ... 533

effective in the EU: welfare impact and potential scenarios

E ^XECUTIVE S ^UMMARY

Private enforcement of antitrust rules has been possible in the European Union since the 1957 Treaty of Rome. The role of private enforcement in complementing public enforcement by competition authorities has been often stressed by the European Commission, and gained new momentum after the modernisation of EC competition law. As recalled in Regulation 1/2003, the role of national courts in protecting subjective rights and awarding damages to victims of infringements complements that of the competition authorities. The European Court of Justice (ECJ) decisions in Courage v. Crehan and in Manfredi recognised that the full effectiveness of the Treaty would be put at risk if it were not open to any individual to claim damages for loss caused to him by conduct liable to restrict or distort competition. At the same time, the ECJ held that there is an obligation to provide for effective means to exercise the right to compensation of harm suffered as a result of an antitrust infringement.

Against this background, private enforcement of antitrust laws through private damages actions has been found to be in a state of ―total underdevelopment‖ in a study carried out in 2004 for the European Commission, and the analysis we performed (contained in Section 1.2.2 of the Introduction to our Report) suggests that things have not significantly improved since then, although in a very narrow set of countries antitrust damages actions seem to be slowly becoming more frequent. As a matter of fact, 17 of the 27 Member States still have no trace of private antitrust damages actions, and also in other Member States private antitrust litigation seems very sparse and related to isolated streams of cases. In the EU27, public enforcement remains by far the most common remedy for antitrust infringement, whereas in other countries, the vast majority of all antitrust cases are pursued by private parties as opposed to the competent public authority (in the US, for example, the ratio of private to public cases is approximately 9:1).

The potential benefits of effective antitrust damages actions in the EU include:

(i) increased corrective justice – i.e. securing that victims of anticompetitive conduct are fully compensated for the loss sustained; (ii) enhanced deterrence – i.e., ensuring that undertakings that violate Community antitrust law completely internalise the negative externalities they impose on society by means of anticompetitive conduct, expressed in terms of overcharges and

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

(additional) deadweight loss; (iii) internal market benefits – i.e., ensuring that EU businesses and citizens are put in similar conditions to exercise their right to damages throughout the territory of the EU, and reducing legal uncertainty for undertakings wishing to engage in cross-border trade.; (iv) bringing competition law closer to the citizen – i.e., raising the awareness of citizens as regards the benefits of effective competition policy as well as their right to claim damage compensation in case of antitrust injury can contribute to the development of a solid culture of competition in Europe; and (v) macroeconomic impacts – e.g., positive effects in terms of competitiveness, growth and jobs due to more competitive markets, which reduce allocative inefficiency by leading to greater output, lower prices and better quality.

The path towards achieving the goal of effective antitrust damages actions in Europe must be approached with caution, in order to secure the potential advantages of creating a ―second pillar‖ of enforcement in Europe, without incurring the drawbacks of badly designed private damages actions. The European Commission identified possible policy options in the 2005 Green Paper on damages actions for breach of EC antitrust rules. The adoption of a White Paper on antitrust damages actions is expected in 2008.

The present study is conceived to support the impact assessment of the upcoming White Paper. The study is composed of three main parts: in Part I, we review the existing literature and academic debate, illustrate the impact of the current ineffectiveness of antitrust damages actions in the EU and assess the maximum expected impact of a more effective system of private antitrust damages actions, intended as the ―frontier‖ Europe could reach if actions for damages developed substantially in the years to come; in Part II, we assess the impact of alternative policy options for seven different proposed measures, ranging from multiple damages to fee-shifting rules, rules on group litigation, access to evidence, limitation periods, the treatment of leniency applicants in private damages cases and methods to calculate damages; in Part III, we combine our assessment of these specific issues into a scenario analysis. The main findings of our analysis are summarised below.

1 The potential impact of more effective private damages actions

Predicting the future development of private damages actions in Europe is not straightforward, as the legal changes that would be introduced in order to facilitate private actions for damages are not defined yet. In Part I of our Report, we develop a range for the potential impact of more effective private damages actions for breach of the rules prohibiting cartels and other types of anticompetitive behaviour, by relying mostly on data from a jurisdiction with effective private enforcement, i.e. the US, although it is often observed that in the latter jurisdiction a ―litigation culture‖ has emerged in the past years.

Accordingly, the results we obtain are to be considered as a mere indication of

the potential for private antitrust damages actions to provide private parties with recovery of antitrust injury, not as a precise calculation of how the future antitrust enforcement will look like in the EU27.

The main results of our analysis are the following:

 Under reasonable assumptions (e.g., a detection rate of cartels of 20%), if double damages with no prejudgment interest (to be considered as broadly comparable to single damages plus prejudgment interest) are available, the yearly damage recovery could reach €17.3 billion; whereas, if treble damages without prejudgment interest (or double damages with prejudgment interest) were awarded, the yearly damage recovery could reach €25.7 billion. This would amount to 0.23% of EU GDP. If double damages plus prejudgment interest were introduced only for cartel cases, economic actors suffering antitrust injury may recover up to €20.9 billion Euros yearly. This would amount to 0.19% of EU GDP¹.

 The impact on deterrence is significant at the margin, although firms would still not be fully deterred from forming cartels and engaging in other anticompetitive conduct. Prospective infringers may face an expected liability of up to €29.4 billion yearly (including the opponents‘ legal fees).

 If private antitrust damages actions do not become more effective in the years to come, foregone benefits for victims of antitrust infringement would range between €5.7 billion and €23.3 billion.

 Expected costs are significant, but never offset the corrective justice impact of enhanced private antitrust enforcement. Lawyers‘ fees and court fees, which are by far the largest portion of expected costs, would amount to approximately 15%-20% of damage recovery (this result was reached using US data as a benchmark, as no EU data were available).

 Overall, more effective enforcement of antitrust laws in Europe (with public and private enforcement) could bring about yearly social benefits as high as 1% of GDP, or €113 billion in 2006. The contribution of private enforcement to this impact is expected to be substantial.

2 Selected options and scenarios

In assessing alternative policy options, we analyse potential benefits under three main headings, defined as follows:

 Impact on corrective justice. We consider this goal to be fully achieved whenever private claimants are granted restitutio in integrum, and

1 Note, in this respect, that according to existing studies (i.e. Lande 1993, Lovell 1982) treble damages without prejudgment interest would fall between single and double damage awards with prejudgment interest.

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

accordingly neither over- nor under-compensation are likely to be observed.

We distinguish between (i) increased number of compensated victims; and (ii) extent to which compensation is aligned with actual harm.

 Impact on deterrence. We consider this impact to be maximised when the best possible level of deterrence is achieved – thus, neither under- no over- deterrence emerges from the implementation of a given option. Deterrence can be achieved due to superior information available to private claimants;

due to increased likelihood that a legal action is initiated; and as a result of increased prospective liability for would-be infringers.

 Impact on the internal market. This includes potential benefits as regards the elimination of disparities in the legal regime for antitrust damages actions in the member states, and the creation of a level playing field between national jurisdictions as regards both the possibility for private claimants to seek compensation in national courts, and the reduction of legal uncertainty, which can represent a barrier for companies wishing to engage in cross- border trade.

As regards potential negative impacts, we analyse the following cost items:

 Litigation costs. This category of costs includes the cost for litigants when the case is brought to court; settlement costs; and the enforcement cost for courts and competition authorities.

 Administrative burdens. In line with the European Commission‘s Impact Assessment Guidelines, we include in this category only ―costs incurred by enterprises, the voluntary sector, public authorities and citizens in meeting legal obligations to provide information on their action or production, either to public authorities or to private parties.‖ As a result, trial costs and other enforcement costs that do not depend on a specific information obligation included in the law are not considered as administrative burdens, and are categorised as costs in the broader ―litigation costs‖ heading described above.

 Error costs. This category includes the costs related to the likelihood that courts issue a mistaken decision concerning the existence of an infringement, proof of causation or the occurrence of harm. Thus, this heading covers mostly the likelihood of type I and type II error costs (i.e., costs of false convictions and false acquittals), but includes neither errors in the quantification of damage (included as over- or undercompensation in

―impact on corrective justice‖ above); nor the extortion of settlements by claimants bringing frivolous suits (included as over-deterrence in ―impact on deterrence‖ above, and in litigation costs if it leads to significant increase in the number of strategic actions filed).

 Harmonisation costs. These relate to the need to introduce changes in national jurisdictions to increase the effectiveness of private antitrust damages actions, in response to an initiative at EU level.

In addition, we consider the likely impact of the selected scenarios on SMEs and consumers; as well as in macroeconomic terms, on competitiveness, growth and jobs.

In Part II of our Report, we perform a qualitative assessment of the options, which results in summary tables at the end of each section. For each benefit and cost heading, we also assess the available options by associating scores from ―0‖

to ―5‖, where ―0‖ means that the impact is lowest, and ―5‖ that the impact is highest. Our scores only provide a measure of the ―intensity‖ with which certain effects would materialise under each of the options. On this basis, we assess the following potential types of rules for enhancing the effectiveness of antitrust damages actions:

 Costs and rewards of antitrust damages actions. We assess the costs and benefits of a number of different options, which combine rules on damage multiples (single damages; double damages for cartels; double damages for all types of infringements; decoupling of damages) with rules on fee allocation (loser- pays; one-way fee-shifting, meaning that the losing claimant does not have to pay the defendant‘s legal expenses; and discretionary fee-shifting rules such as cost-capping or cost-protection orders). We also discuss the impact of conditional and contingency fees and an option where the competition authority acts as amicus curiae for the quantification of overall harm.

 Group litigation. We assess the costs and benefits of opt-in collective actions, opt-out collective actions, opt-in representative actions, opt-out representative actions, mandatory representative actions, joinder of parties and test cases, and joinder of claims.

 Access to evidence. This section assesses the pros and cons of the different policy options set out in the Green Paper, which all preserve the requirement of fact-pleading, although with a reasonable threshold for initial fact-pleading to facilitate access to justice. We analyse options such as the possibility to request the disclosure of specific documents, of classes of documents, and also an adversarial system of inter partes disclosure. In addition, we also analyse two options as regards the disclosure of documents handed over to the competition authority in a previous public proceeding – one imposing a disclosure obligation directly on the defendant, the other entailing a request by the judge.

 Damage calculation. In this section, we compare the merits of harm-based methods and gain-based methods (i.e. methods that approximate the damage suffered by the claimant by assessing the profit reaped by the defendant as a result of an antitrust infringement). We survey available techniques such as overcharge-based methods, and techniques used to measure lost profits. We assume that adopting only a gain-based method would be hardly feasible and certainly not desirable, and consequently we provide an impact assessment of an option which entails the availability of gain-based measurement whenever the harm is difficult or impossible to

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

calculate. We finally combine the harm-based and gain-based options with two different assumptions as regards the calculation of the prejudgment interest – depending on whether interest is calculate from the date in which the infringement occurred, or from the date in which the harm suffered by the claimant occurred.

 Passing-on defence and indirect purchasers‘ standing. At EU level, the decision of the European Court of Justice in the Manfredi case implies that indirect purchasers cannot be refused to have standing. At the same time, there are currently no legal or statutory provisions directly impeding indirect purchasers‘ claims in the European legal systems. In our Report, we assess the potential impact of four different options: (i) allowing the passing-on defence, but not indirect standing; (ii) allowing both the passing-on defence and indirect standing; (iii) denying the passing-on defence, but allowing indirect standing; and (iv) denying both the passing-on defence and indirect standing.

 Interaction between leniency programmes and private enforcement. We compare the impact of two options: (i) a fixed or variable rebate on damages that can be sought from leniency applicants; and (ii) the removal of joint liability of the successful immunity applicant.

 Limitation periods. Finally, we address the issue of the optimal limitation period for antitrust damages claims, distinguishing between standalone actions and follow-on actions. The options we consider are: (i)

―independence of private and public enforcement‖ where no suspension of the limitation period is provided if a competition authority starts a proceeding on a related issue; (ii) the ―German option‖, where the limitation period is suspended when the competition authority institutes a proceeding that is relevant for that same damage action, and resumes again when the proceeding is closed; (iii) a ―modified Spanish option‖, in which a new limitation period starts running after a court of last instance has decided on the issue of infringement; and (iv) a ―shortest period option‖, where the limitation period is five years from the date in which the private party having suffered antitrust injury becomes aware of the damage suffered, or 1- 2 years from the date when a public decision on the matter cannot be challenged anymore, whichever is shorter.

2.1 Impact assessment of selected scenarios

In order to assess the combined effect of a number of different individual measures, the European Commission selected five alternative bundles of measures as potential policy scenarios for further analysis in our Report. The five scenarios selected for in-depth assessment are intended to reflect the wide spectrum of options for individual measures identified in the Green Paper and analysed in detail in Part II of our Report. In addition, there is a no intervention

and a non-regulatory policy scenario. The combination of various individual measures in the scenarios was made so that each scenario reflects a coherent policy line and similar level of intervention. The table below summarises the scenarios identified, which are constituted of different combinations of policy options already assessed – for the most part – in Part II of our Report.

Table A – Selected scenarios

N. Damages Cost rule Access to

evidence Passing-on

defence Indirect

purchaser Collective

redress Limitation period

0

1

plus prejudg,

interest

One-way fee-shifting

Broad disclosure with

low threshold

Not allowed Allowed Opt-out class actions

20 years as of damage +

subjective period of 5

years

2

interest

Loser-pays, but judge may shift all

costs

Initial provision of lists + Broad disclosure based on fact-

pleading

Allowed Allowed Opt-in collective +

non- mandatory representative

actions

Minimum 5 years as of reasonable knowledge + restart (2

years)

3

plus prejudg,

interest

Loser-pays, but judge may shift some of the

costs

Disclosure of specific categories of

documents, fact-pleading, proportionality

Allowed Allowed Non-

mandatory representative

actions

Minimum 5 years as of reasonable knowledge

+ suspension

4

dation of single damages

plus prejudg, interest.

Recommen- dation of discretionary

shifting of some of the costs at the

judge‘s discretion

Recommen- dation through

soft-law of measures listed under

option 3.

Recommen- dation of allowing the

defence

Recommen- dation of allowing standing to

indirect purchasers

Recommen- dation of non-

mandatory representative

actions

Recommen- dation of a

5-year limitation period, to be

suspended during a

public proceeding Legenda: shaded areas are those where no binding policy action is needed at EU level

In what follows, we summarise our benefit-cost analysis of each of the scenarios identified.

2.1.1 “No policy change” scenario 2.1.1.1 Benefits

 Corrective justice. We found no strong evidence suggesting that, absent intervention at Community level, the number of compensated victims will increase rapidly in the next few years. In this respect, the ―no policy change‖

scenario corresponds to a continued very low level of corrective justice.

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

 Deterrence. The ―no policy change‖ scenario would entail, at best, a very small increase in deterrence in the years to come, thanks mostly to national initiatives aimed at encouraging actions for damages. The impact on cartel deterrence of the ―no policy change‖ scenario would be minimal from a forward-looking perspective; private damages actions may to some extent develop for vertical restraints – where private antitrust litigation is already common in some countries – whereas as regards other abuses of dominance, under this scenario private parties would not be able to effectively contribute to enforcement, mostly due to costly litigation and low win rates.

This in turn would lead to a negligible contribution to deterrence.

 Internal market. Under the ―no policy change‖ scenario no positive impact would be felt on the internal market goal - the current fragmentation could be even more visible in a few years from now. We also found no evidence that suggests that a virtuous ―mutual learning‖ process (or a ―race to the top‖ in a competition of legal orders) would stimulate the adoption of best practices in Member States. To the contrary, forum shopping is likely to emerge, with some countries becoming more attractive fora for damage actions than others.

2.1.1.2 Costs

 Litigation costs. If we assume that a slight, gradual increase in the number of cases would emerge even absent EU intervention, litigation costs may correspondingly increase. To be sure, in individual cases litigation costs may be very high. But overall, given the low number of cases expected under this scenario, the impact is very small.

 Administrative burdens are not likely to increase under this scenario. As an upper-bound assessment, we can assume that: (i) a (slow) development of private enforcement in the next few years may slightly increase the

―population‖ associated with some administrative activities, such as disclosure of specific documents during trial; and (ii) changes in national legislation may lead to broader disclosure obligations and/or a relaxation of the threshold for initial fact-pleading. Were this to be the case, the

―frequency‖ of some administrative activities linked to information obligations would further increase. Overall, the impact would not be substantial.

 Also error costs would remain negligible as they are today. In absolute terms, Type I and Type II errors may increase if the number of cases filed also gradually increases overtime. At the same time, however, the statistical incidence of error costs would decrease alongside with an increase in the number of cases filed, as courts get more familiar with the technicalities of private enforcement.

 Finally, absent EU intervention, no harmonisation costs would emerge.

2.1.1.3 Other impacts

 SMEs and consumers would be the most disadvantaged categories under the

―no policy change‖ scenario: absent intervention at EU level, in most member states smaller claimants would still face significant obstacles in obtaining access to justice to exercise their rights to compensation of harm suffered. In addition, as we explain in Part II of the Report, the lack of significantly widespread group litigation in EU countries would leave smaller claimants having sustained small losses virtually unable to exercise their rights.

 As regards macroeconomic impacts, under this scenario the contribution of private antitrust enforcement to market efficiency would remain very limited, as we expect only a slow development of private antitrust litigation over the next years.

2.1.2 Scenario 1: summary of impact assessment

Under scenario 1, double damages (including pre-judgment interest) would be introduced for all types of antitrust infringement together with mandatory one- way fee-shifting and broad disclosure rules subject to fact pleading; the passing-on defence is excluded, whereas the passing-on offence is allowed. A system of opt-out class actions would be introduced. Finally, a 20-year limitation period from the occurrence of the damage claimed would be introduced, together with a subjective limitation period of 5 years from the date in which the claimant had reasonable knowledge of the harm. Below, we assess the likely impacts of this scenario in terms of benefits and costs.

2.1.2.1 Benefits

 Corrective justice. Scenario 1 would exert a positive impact since the number of compensated victims would substantially increase; at the same time, for each of the victims, overcompensation might materialise in some cases. As a matter of fact, although double damages (including prejudgment interest) may in principle overcompensate claimants with respect to the actual loss sustained, in reality most cases settle before trial for amounts lower than the nominal damage claim. Opt-out class actions would lead to compensation of a larger number of victims, although the precise effect on corrective justice crucially depends on how damages are collected and distributed. Broad disclosure rules with a low threshold can increase the number of compensated victims and increase the accuracy of fact-finding, consequently allowing for a more precise quantification of the actual loss suffered. The 5-year subjective limitation period certainly exerts a positive impact on corrective justice, as it gives sufficient time for claimants to exercise their rights; however, the absence of suspension or restart may create situations in which claimants have insufficient time to exercise their right to damages. Finally, excluding the passing-on defence can exert a

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

mixed impact on corrective justice, leading in some cases to instances of duplicative liability.

 Deterrence. This scenario would clearly increase the deterrence effect of private enforcement. Defendants would face both a higher number of lawsuits and also larger expected liability. For (i) cartels, this option would certainly provide economic actors with a significant incentive to monitor and detect infringements, and at the same time would greatly facilitate actions by victims having suffered scattered damages, through opt-out class actions; (ii) for vertical restraints, the effect is highly positive, although likely to prove over-deterrent, as mandatory one-way fee-shifting and broad disclosure rules would provide claimants with the possibility of threatening to sue the defendant, imposing on the latter significant litigation expenses;

(iii) in abuses of dominance, the likelihood of strategic lawsuits and the development of a ―litigation culture‖ would be even more pronounced. An over-deterrent effect of private damages actions may also emerge since direct purchasers would have an increased incentive to file suit, given that the passing-on defence is not allowed.

 Internal Market. This scenario entails the creation of an entirely new and far-reaching set of rules that would be applicable in all EU member states.

Needless to say, this option would contribute to put European victims in similar conditions as regards the possibility to exercise their rights to compensation before national and foreign courts.

2.1.2.2 Costs

 Litigation costs. Many of the features of this scenario facilitate litigation, be that for meritorious or for unmeritorious reasons. The major factors that would affect litigation costs are the combination of one-way fee-shifting, double damages and broad disclosure rules – which maximises the incentive to litigate, again leading in some cases to frivolous lawsuits; and opt-out class actions, which are normally very expensive to litigate.

 Error costs. On the one hand, broad disclosure rules would enable a more accurate scrutiny of the facts by the court, leading to a lower statistical incidence of errors. However, as litigation increases, errors would increase in absolute terms. In addition, the negative impact of each false acquittal and each false conviction would become greater, due to the combined effect of the damage multiple, opt-out group litigation and the absence of the passing-on defence. The magnitude of error costs is likely to be larger for cartel cases and for cases of abuse, as in cartel cases the number of victims represented in opt-out actions is likely to be large in some cases, and in cases of abuse the incentive to file strategic lawsuits would be significant.

 Administrative burdens. Scenario 1 would lead both to a significant increase in the ―number‖ of information obligations (due to broader disclosure rules); in the ―population‖ of firms affected by each information obligation;

and in the ―frequency‖ of administrative activities associated with each information obligation (due to an increase in the number of cases).

 Harmonisation costs. Scenario 1 is very far from the ―no policy change‖

scenario, and would entail a brand new set of legal rules for most, if not all member states. Harmonisation costs would be consequently very high.

Although it is certainly true that harmonisation costs are one-off costs to be weighed against more long-lasting benefits, in this case the enhancement of private antitrust actions that would certainly be observed under option 1 would come at a remarkably high cost.

2.1.2.3 Other impacts

 This scenario would definitely bring competition laws closer to smaller claimants, such as SMEs and consumers. Since these categories are most likely to have limited financial resources to devote to litigation and may be more risk averse, mandatory one-way fee-shifting, especially if coupled with broad disclosure rules, can facilitate them in suing for damages. Opt-out class actions also have the potential to involve larger classes of consumers and small firms having suffered scattered damages. At the same time, depending on market conditions, consumers might be harmed by the development of a ―litigation culture‖, especially if litigation expenses for industry players increase significantly.

 Assessing the likely macroeconomic impact of this scenario is difficult, as a lot would depend on whether a ―litigation boom‖ would emerge in Europe. If sufficient safeguards are introduced, especially to avoid the proliferation of frivolous and strategic suits, this scenario is expected to bring substantial benefits in terms of growth and employment if compared to the ―no policy change‖ scenario, as it bears a potential impact on the competitiveness of markets and the possibility of entry of new firms.

2.1.3 Scenario 2: summary of impact assessment

This scenario entails the introduction of double damages only for cartels, whereas single damages would be awarded for all other types of infringement.

Damage awards would include pre-judgment interest. As regards access to evidence rules, this would be based on an initial provision of lists of documents, leading to a rather broad possibility of disclosure based on fact-pleading. Both the passing-on defence and offence are allowed. No mandatory one-way fee- shifting would be introduced, but the judge would be given the discretion to derogate from the ―loser-pays‖ rule by shifting all costs. These rules are coupled with opt-in collective actions, plus non-mandatory representative actions. The minimum limitation period is set at 5 years from the date in which the claimant should reasonably have realised the occurrence of damage, but a new limitation period of 2 years would start after the end of a public proceeding.

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

2.1.3.1 Benefits

 Corrective justice. Imposing single damages plus prejudgment interest for non- cartel cases avoids the problem of overcompensation of claimants, although – compared to scenario 1 – the number of compensated claimants would be somewhat lower, due to a weaker incentive to file suit. In addition, some claimants in cases other than cartels may end up being undercompensated as most cases settle before trial for lower amounts than the actual harm suffered. Broad disclosure based on an initial provision of lists can reach the desirable results of facilitating proof of causation for claimants. Opt-in collective and representative actions ensure that scattered damage is compensated to a group of identifiable consumers. Corrective justice could also be enhanced by discretionary fee-shifting rules, if correctly implemented with clear guiding principles. Not excluding the passing-on defence is also more in line with the corrective justice goal. Finally, the limitation period selected in scenario 2 is the most desirable, as we observe in Section II.7 of our Report, as it ensures that claimants would have sufficient time to exercise their rights both in standalone and follow-on cases, without creating excessive uncertainty for potential defendants.

 Deterrence. This scenario would increase the deterrence effect of private antitrust damages actions, although to a lesser extent than scenario 1. For cartel cases, double damages and group litigation would encourage victims to exercise their right to damage compensation, with no risk of overdeterrence. The risk of overdeterrence is also minimal for vertical restraints, due to the absence of double damages. In these cases, informed claimants may be facilitated in filing suit mostly due to the access to evidence rule based on the initial provision of lists, which we found to be the most suitable to facilitate lawsuits and increase deterrence in Part II.3 of our Report. A similar rationale applies to abuses, where competitors and downstream purchasers are likely to act as claimants: article 82 cases are often very time-consuming, and proof of antitrust injury could be arduous and require a lengthy litigation process. Discretionary one-way fee-shifting can encourage claimants to file a meritorious lawsuit even if they fear that litigation would be lengthy and costly.

 Internal market. Action may be needed for all individual measures, which would entail a transition period, after which EU member states would be endowed with a new legal system for antitrust damages actions. The likelihood that scenario 2 contributes to creating a level playing field is also high as the underlying assumption of this scenario is that the envisaged rules would be introduced through binding Community legislation.

2.1.3.2 Costs

 Litigation costs would increase under scenario 2, although to a lesser extent than under scenario 1. In particular, most of the increase would be due to

the achievement of the overarching goal of the policy actions at hand – ensuring that victims of EC competition law infringements have access to truly effective mechanisms for obtaining full compensation for the harm they suffered. This includes, most notably, the availability of opt-in collective and representative actions. Important safeguards against unmeritorious actions would be: (i) the judicial control of one-way fee- shifting and; (ii) requiring that the judge controls the proportionality of access requests in inter partes disclosure rules, although ex post – i.e. leaving it to the parties to exchange documents, but intervening in case the request is disproportionate.

 Error costs. Even if, due to the increased number of cases, the absolute number of mistaken judgments might increase, we do not expect scenario 2 to cause an increase in the statistical incidence of error costs. Rather, broad disclosure rules should enable more accurate fact-finding, and the application of the loser-pays rule – when the judge does not order one-way fee-shifting – stimulates a better selection of cases for litigation, thus preventing frivolous suits.

 Administrative burdens under scenario 2 would be mostly due to broad disclosure rules, which may increase the frequency of information obligations, such as gathering and communication of documents, and the increase in the number and type of documents that may be kept and communicated. Overall, the increase in administrative burdens would be lower than under scenario 1, although compared to the ―no policy change‖

option the population of affected businesses would be larger, and the frequency and time associated with some information obligations will strongly increase compared to status quo.

 Harmonisation costs. Scenario 2 entails the enactment of a number of far- reaching changes to national laws, especially as far as civil procedure rules are concerned. The most significant harmonisation costs that would emerge include the need to overcome the problem of double damages in most member states; and the introduction of broad disclosure rules that resemble more an adversarial, rather than inquisitorial access to evidence system, and require no ex ante control by the judge.

2.1.3.3 Other impacts

 The availability of representative actions could greatly encourage SMEs and consumers to get involved in antitrust damages actions, as it would reduce the cost of filing suit, informing the unaware victims and reducing the rational apathy problem. Also the introduction of double damages for cartel cases and discretionary fee-shifting, when applied on the basis of clearly specified criteria (e.g. the financial conditions of the claimant), may encourage these claimants to file suit.

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

 As regards macroeconomic impacts, the outlook of scenario 2 would appear less uncertain than that of scenario 1. We see no significant risk of a deteriorating business environment due to excessive litigation. To the contrary, we consider that this scenario would positively contribute to the deterrence and corrective justice goals of antitrust enforcement, by fostering the creation of the ―second pillar‖ of enforcement.

2.1.4 Scenario 3: summary of impact assessment

This scenario would imply the award of single damages (including pre- judgment interest) for all types of infringement. Access to evidence would be based on disclosure of specific categories of documents, fact-pleading and proportionality criteria. Both the passing-on defence and offence are allowed.

The judge would be given the discretion to derogate from the ―loser-pays‖ rule by shifting some of the costs borne by the parties. Non-mandatory representative actions would be available for all types of infringement. The minimum limitation period is set at 5 years from the date in which the claimant should reasonably have had knowledge of the occurrence of damage, but such period would be suspended in case a public proceeding is started.

2.1.4.1 Benefits

 Corrective justice. Scenario 3 would contribute to the attainment of corrective justice, although to a lesser extent than scenarios 1 and 2.

Compared with the status quo, this scenario increases the extent to which victims receive restitutio in integrum, but does not lead to a large increase in the number of compensated victims. Incremental corrective justice would be achieved mostly as a result of representative actions and the disclosure of classes of documents. The 5 year minimum limitation period is certainly sufficient to enable recovery of antitrust injury: however, as we observed in Part II of our Report, the suspension of the limitation period under this rule may create a narrow set of cases in which the remaining time for exercising a private right following a previous decision would be insufficient.

 Deterrence. This scenario would contribute positively to deterrence, although the extent of this contribution would be significantly smaller than under scenarios 1 and 2. The disclosure of classes of documents would increase the probability of success for claimants compared to the status quo, at the same time increasing accuracy in damage assessment, which can contribute to deterrence. The introduction of representative actions may lead to significant benefits in terms of improved information/detection in cartel cases, as proving the existence of a cartel tends to be a very complex exercise.

In addition, a representative action by a consumer association may cure the rational apathy problem in case of scattered damages. In cases of vertical restraints, some information savings would materialise, as parties do not always possess optimal information. In cases of abuse of dominance, the availability of representative actions would contribute positively to

deterrence, especially since these forms of litigation exhibit significant economies of scale, can cure the rational apathy problem and also stimulate further individual proceedings from plaintiffs outside the represented group. Finally, representative bodies (especially trade associations) may have informational advantages compared to their represented parties. Given the features of scenario 3 – e.g. the loser-pays rule and narrower disclosure rules than in scenarios 1 and 2 – we deem unlikely that frivolous suits would increase significantly.

 Internal market. This scenario would enable partial convergence as regards limitation periods and the use of discretionary partial fee shifting, which is already applied in some countries. Most importantly, representative actions would become available in all member states. At the same time, however, this scenario would introduce only a limited set of new rules, whereas some EU member states (e.g. the UK) already have a different set of rules for encouraging private antitrust enforcement. For example, punitive damages and the adversarial model of inter partes disclosure would remain available only in a few European countries. All in all, the conditions for bringing claims for antitrust injury in Europe would remain different from country to country.

2.1.4.2 Costs

 Litigation costs would slightly increase compared to the status quo, as a consequence of the increased number of actions. Such an increase would be mostly due to representative actions, and only marginally because of the disclosure rule and the discretionary, partial fee-shifting. At the same time, there are reasons to expect that litigation costs per case would decrease, as representative actions may reduce costs for claimants and for courts in cases involving large groups of members, and the disclosure rule may reduce the cost of gathering evidence for both claimants and defendants due to the more reasonable threshold for initial fact-pleading and the broader scope of disclosure relative to status quo in most countries. As the disclosure rule preserves the centrality of the judge, costs for the parties and the risk of both

―fishing expeditions‖ and ―discovery blackmail‖ would be reduced. As a result, we expect total litigation costs under this scenario to exhibit a slight increase, depending on the uptake of representative actions in the member states.

 Error costs. Under this scenario, we also see no reason why these costs should increase, at least in terms of statistical incidence on the total number of trials. To the contrary, more accurate fact-finding due to access to a larger amount of information in many countries may lead to lower incidence of errors. This effect may be offset by the expected slight increase in the number of cases.

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

 Administrative burdens would slightly increase as a result of the introduction of access to classes of documents, because of the expected likely increase in the number of cases and of the longer limitation periods in some member states (i.e., Cyprus, Spain, Portugal, Malta, Lithuania and Slovenia), leading to longer record-keeping obligations and accordingly an increase in the time associated with each record-keeping obligation.

 Harmonisation costs would not be as high as in the previous two scenarios, and would be mostly due to: (i) an extension of limitation periods for antitrust damages actions in Cyprus, Spain, Portugal, Malta, Lithuania and Slovenia; (ii) changes in access to evidence rules in most countries, i.e. those countries where disclosure is limited to specifically identified documents;

and (iii) the need to allow for representative actions brought by qualified or

―certified‖ bodies. Whether discretionary partial cost-shifting would entail harmonisation costs, it depends on the way in which such rule would be introduced at EU level.

2.1.4.3 Other impacts

 Overall, scenario 3 may encourage and help SMEs and consumers to get involved in private damages claims, mostly thanks to the availability of representative actions, although the degree of involvement would be lower than under scenarios 1 and 2. In particular, smaller claimants wishing to initiate a standalone lawsuit would be still significantly discouraged, especially if they do not possess enough information to substantiate their claim.

 The macroeconomic impact of this scenario relative to the ―no policy change‖ scenario will be smaller relative to scenarios 1 and 2, but still significant. This set of rules is less likely to enable the emergence of a strong

―second pillar‖ of enforcement, but would add to public enforcement the instrument of representative actions by certified and qualified bodies.

Accordingly, the emergence of any impact depends on whether representative actions would actually develop, allowing consumers and businesses to exercise their rights at lower costs.

2.1.5 Scenario 4: summary of impact assessment

Scenario 4 is identical to Scenario 3, but – unlike the first three scenarios – does not entail any legislative measure at EU level. Under scenario 4, the European Commission would identify and recommend the adoption by member states of a set of measures and good practices observed at national level, with a view to facilitating antitrust damages actions in the EU. Accordingly, this option only requires the issuing of soft law by the Commission. Compared to the previous scenarios, the suitability of scenario 4 to achieve the desired goal of ensuring that victims of EC competition law infringements have access to truly effective mechanisms for obtaining full compensation for the harm they suffered –

besides a more general ―awareness-raising‖ impact – would have to rely on: (i) a ―moral suasion‖ effect, which leads member states to consider legislation according to the recommendations of the Commission; and (ii) a ―regulatory competition‖ effect, with best practices being adopted by member states through mutual learning, leading to a ―race to the top‖. However, our findings in the Report suggest that there is no evidence that these effects would actually emerge in Europe.

2.1.5.1 Benefits

 Corrective justice. The prospects for increased compensation of harm suffered would be mostly dependent on whether, on top of the very few national legislators that are already taking action to enhance private antitrust enforcement, others would follow suit due to soft law, awareness- raising instruments are adopted by the Commission.

 Deterrence. The adoption of soft law recommending a limited number of legal changes would entail a fairly limited impact. As scenario 4 is identical to scenario 3, but is implemented only through soft law (i.e. a recommendation), the already limited impact of scenario 3 on deterrence – mostly confined to the introduction of representative actions, discretionary partial cost-shifting and access to classes of documents instead of specific documents – here becomes even weaker.

 Internal market. We do not consider this option as likely to achieve a level- playing field, by putting European businesses and consumers in similar conditions to exercise their right to damages regardless of the national jurisdiction where they seek redress. To the contrary, if existing differences in legal regimes persist or become even wider, a significant risk of ―forum shopping‖ by claimants might emerge, leading to selective litigation and a further fragmentation in the application of competition rules in EU member states.

2.1.5.2 Costs

 Litigation costs. The impact of soft law adopted by the European Commission on litigation costs would not be significant. To the extent that this action leads national legislators to enact legislation in this field, an increase in litigation costs may ensue. If representative actions become more widespread, litigation costs per case would decrease due to economies of scale.

 Likewise, it is impossible at this stage to assess what the impact of scenario 4 would be on administrative burdens and error costs. Even if legislation is enacted at national level, the impact would be low, as the legislation enacted would be of the same type analyse in scenario 3 by definition. And harmonisation costs would not emerge, as there would be no direct harmonisation imposed by EU legislation; Member States that follow the

MAKING ANTITRUST DAMAGES ACTIONS MORE EFFECTIVE IN THE EU

Commission recommendations would anyway incur some implementation costs, which anyway would not necessarily lead to harmonisation at EU level.

3 Conclusion

Our Report contains an extensive analysis of policy options aimed at making private antitrust damages actions more effective in the EU, which we first analyse in isolation, and then combine into policy scenarios. After providing an estimate of the potential impact of a more effective system of private antitrust enforcement in Europe, which we find to potentially lead to damage recoveries of €25.7 billion yearly, we compare alternative scenarios that could, although to different degrees, approximate this potential. The five scenarios identified have widely different impacts on both benefits and costs, and indicating the most suitable combination of options would fall outside the scope of this report:

however, we found strong evidence in favour of action at EU level, as the use of soft law measures does not seem suitable to significantly increase the corrective justice and deterrence goals that are embedded in this policy initiative.